‘Relooking Systems, Controls And Processes’
Vikram Limaye (50), has stepped into the hot seat of the NSE and has hit the ground running filing a consent application with Sebi (in a case which says it gave preferential access to some high-frequency traders and brokers) even as the Nifty scaled a new peak and crossed the five-figure mark. The CEO & MD of NSE spoke to Clifford Alvares and Raghu Mohan on various steps the exchange has taken in the recent past to set things right at the NSE.
Edited excerpts:
How have your first few weeks been? You have hit the ground running and the markets have hit 10000.
It has been hectic. Resolving the regulatory issue is a priority for which I have filed a letter with Sebi for settlement under the consent process. We have also filed a report with Sebi relating to the trading halt. I am working on improving stakeholder relationships with Sebi, government, clients, shareholders, media and employees.
What did you say in the consent letter? What are the terms of settlement?
It is an application to settle the matter without admission of guilt or wrong doing. The amount and terms would be mutually agreed based on discussions with Sebi.
What are the grounds for the consent application?
NSE is an institution of national importance. You don’t want overhang of investigations for too long which could be the case if this was to go through the court process. We would like to resolve the issue and move on and that I believe will also be in the best interests of markets and investors domestically and globally.
What do you think the learnings are from this issue?
I just think that if the issue was managed better it would not have escalated to this level. The discussions with the regulator could have been handled better relating to the technology and any gaps/lapses in process and documentation could have been fixed.
So you are having a re-look at internal systems?
Yes, we are looking at the systems, controls and processes so that management and the board are comfortable that the foundation of the organisation is strong.
Have all the 14 employees filed consent?
There are 11 out of the 14 who have filed so far.
How long do you think the whole process is going to last?
My hope is that it will be resolved in the next six months.
On the trading glitch, are there any changes that you have been asked to carry out?
We have submitted our report to Sebi in which we have outlined remedial steps, which incorporates views of our vendors. There was no issue surrounding cyber security or hacking. We have discussed with CERT and they are satisfied with our report that there was no cyber-attack or hacking.
If you could go back in time and tell us what happened?
The simplified version of it is that we are dealing with two systems. One is a legacy proprietary system operating at a certain speed, and one is a newer open source system operating at a faster speed. There is an interaction and messages that go back and forth between the two. But because of the difference in speed, one system was expecting a response in a certain way, and that didn’t happen, and so the other system waited because of which the entire system hung up in terms of processing the market opening.
There are things to be done from a design perspective, automation standpoint and the contingency measures that need to be adopted. We are working on these fronts to make sure these issues are plugged. While you never want any trading halt on an exchange, there are instances of this happening in several exchanges since it is very hard to plan and think through everything that could go wrong. This kind of trading disruption hasn’t happened on NSE for the last 20-plus years, so the technology is robust and there is nothing to worry about. Technology has been the strength and differentiator for NSE.
You have launched some foreign derivative products in the international exchange? How has the progress been?
It is still early days since we started two months ago, and the volumes are very low. The product approvals were very recent. We need to get more liquidity and that will require several things to fall into place. We are working on all of them.
What are the new products that you are launching on the NSE?
There are various products on the fixed income and equity side that are awaiting Sebi approval such as a corporate bond repo product which could be settled through the clearing corporation. We have also asked for some index products including some that are weekly rather than monthly. We have also asked for cross currency pairs.
Not many Indian indices are available internationally, what are you planning on this front?
That is an area of growth. We have to promote our products internationally through partnerships with other exchanges.
What are your plans for the NSE?
The equity markets are relatively well developed but there is a lot to be done to develop other markets. I believe it is a core part of NSE’s mandate to work with regulators and government for market development. Bond market development is critical to fund the country’s growth since this can’t be achieved just on the back of bank financing. Once the bond market develops, the interest rate futures market and credit derivatives markets will develop. There’s also a huge opportunity in better intermediating retail savings since equity penetration at 7-8 per cent is still very low and has a long way to go.
There are other revenue streams that NSE has. We have a data business, index licensing business, IT business and an education business. If you look at non-exchange revenues for other exchanges it’s about 20-30 per cent, but in our case it’s approximately 10 per cent. So there is a long way to go in growing these other revenue streams beyond the trading fees that an exchange earns.
Do you see India emerging as a supplier of capital for other foreign firms?
There is no reason why we can’t emerge as a platform for foreign companies to list. It will require a lot more domestic capital to be available which is happening with the growth of the domestic mutual fund industry. Ultimately, whether somebody lists here on not has to do with whether or not they will get the right kind of valuation, and whether the ecosystem is supportive from a regulatory and tax standpoint.
How does India Inc. look from the NSE corner room?
The medium-to-long term outlook is good. In the near term, fundamentals need to catch up, whether it is earnings growth or even GDP growth. For the last couple of years, the economy has been firing on the back of consumption and government spending. Private sector capital expenditure and rural consumption needs to pick up. Many of the steps the government has taken will show up in economic growth with a lag. There is political stability and macro-economic stability, and those are critical for any investor to feel confident about investing in the country.
