Self-Regulation in India’s Financial Markets

RBI DG M. Rajeswar Rao in this speech given last week discusses self regulation in financial and forex markets.

When fundamental transformations such as the one we are witnessing takes place, there are many moving parts which need to come together and move in sync. There are many actors who have critical roles to ensure that each of these parts move at the desired pace and efficiency. As stakeholders in financial markets, we all know that it has a critical role to play in funding our growth aspirations and in supporting an increasingly complex and inter-connected financial system. The key actors in financial market development include self-regulatory organisations such as FEDAI. Given that this is a FEDAI conference, let me focus today on the role of self-regulatory organisations (SROs) in market development and market conduct and also set out a few thoughts on the role played hitherto by FEDAI in the development of foreign exchange markets as well as expectations from it going forward.

History of SROs- Before Regulatory authorities, we had SROs in most market segments:

Let me first start with a look at the evolution of SROs around the world. The idea of self-regulation generally involves the members of a group coming together to establish rules of conduct and voluntarily committing to follow those rules.

Self-regulation has a long history of existence in various professions as a means to encourage and promote appropriate conduct by the members of the profession. In the financial sector, elements of self-regulation by stock exchanges dates back more than two centuries with the London Stock Exchange adopting such a system in the eighteenth-century.

In the United States, self-regulation by stock exchanges preceded the creation of the federal regulatory agency, i.e., the Securities and Exchange Commission (SEC). In Canada, the Bond Market Association of the Toronto Board of Trade emerged as an SRO in 1920s. In recent times, SROs in the financial sector have been delegated authority, formally or informally, by public authorities to frame guidelines for appropriate conduct by its members and utilize tools such as voluntary agreements, standards, charters, byelaws, handbooks of market practices, etc., to ensure such appropriate conduct. Effective SROs complement the regulatory and supervisory efforts of public authorities.

Evolution of SRO in India:

17. In India, the history of self-regulation has developed over the years, though formal regulatory frameworks for SROs is of a relatively recent origin. In the foreign exchange market, FEDAI was formed in 1958 to lay down the terms and conditions for operations of Authorized Dealers in India. Similar to the developments in other jurisdictions, stock exchanges in India also have historically performed functions akin to SROs. In 2004, SEBI issued regulations on SROs providing guidelines on eligibility, recognition, functions, and responsibilities of SROs. In the payments and settlement space, RBI has recently (i.e., in 2020) issued a framework for the recognition of self-regulatory organizations for payment system operators.

18. Under FERA, 1947, only a handful of the foreign banks were designated as Exchange Banks and were permitted to provide foreign exchange related services. These banks carried out their business as per the guidelines laid down by the then Exchange Bank’s Association. As more and more banks were allowed to transact in foreign exchange, this structure was formalized with the establishment of the FEDAI on August 16, 1958. In the initial years of its formation, FEDAI’s primary function was setting the basic ground rules for the computation of rates and settlements for inter-bank and customer transactions. Its primary objective was to bring about uniformity in the rates offered by different Authorized Dealers in a bid to avoid unhealthy competition and ensure uniform service to clients9.

19. As the foreign exchange markets developed, the roles and responsibilities of FEDAI also evolved. FEDAI has been instrumental in conceptualising detailed rules on the conduct of foreign exchange business among banks and its customers and has hence contributed to customer protection and fair treatment. It has effectively acted as a bridge between the market participants and the regulator and has contributed to the development of the foreign exchange regime in the country over the years. I do know that FEDAI has also been working towards the training and skill upgradations of professionals working in the foreign exchange arena. It has also been facilitating the implementation / adoption of the Global FX code which sets out principles that promote a robust, fair, liquid, open and appropriately transparent market, underpinned by high ethical standards. More recently, FEDAI took commendable measures during the Covid-19 pandemic to ease the difficulties faced by the Authorised Dealer banks and their customers in carrying out forex business.

He discusses pros and cons of SROs and what future entails.



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