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How is the market regulated?

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How is the market regulated?
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How is the market regulated? - June 28th, 2006

In India, capital markets are regulated by the Securities and Exchange Board of India (Sebi). The capital market regulator came into existence in 1992 through a special act passed by Parliament. The formation of Sebi was a fall-out of the securities scam involving stockbroker Harshad Mehta who, with the help of a handful of banks, succeeded in artificially jacking up stock prices. In the light of the swings it has shown in recent weeks,fe takes a Closer Look at various issues concerning market volatility and how Sebi plays regulator:

Who regulates the Indian capital market?


Sebi regulates the entire capital market and the stock exchanges (SE) are a very significant part of it. Besides, SEs, Sebi regulates mutual funds (MFs), foreign institutional investors (FIIs), stockbrokers, merchant bankers, depositories, venture capital, portfolio managers and other related entities.
A major portion of Sebiís time and energy goes in regulating the secondary market, which is the cash market where the trading of listed stocks takes place. Sebi has created a separate division called the secondary markets division to look after the day-to-day regulatory function of the segment. Recently, this division was renamed the markets regulation department.
What are the risk containment measures Sebi reso-rts to for curbing market volatility?
Besides discharging its day-to-day regulatory function, Sebi also keeps a close watch on price movements and volatility in the market. To curb this volatility , which was the order of the day till recently, the regulator along with the bourses takes various steps for risk containment and tightening of the surveillance mechanism.
These steps may include tightening of various margins or relaxing them, depending on the situation. Different types of margins are the best weapon at the disposal of the regulator. It is through this measure that the regulator can control price volatility of stock. When the price of the stock is rising unabatedly or it is supported without any fundamentals, the SEs in consultation with the regulator can hike the margins to contain volatility.
Other stricter measures to contain volatility include shifting them to the trade-to-trade segment where every order (buy or sell) results in compulsory delivery and no netting is allowed.
Does the Union finance ministry have a role to play in monitoring price movements in stock markets?
The ministry of finance too keeps a watchful eye on the stock market through its capital market division, headed by an officer of the rank of joint secretary. Though the ministry does not interfere in the day-to-day affairs of the market regulator, it does step in when major market movements happen. For instance, the one recently when the 30-share Sensex of the Bombay Stock Exchange (BSE) dipped 1,111 points intra-day and trading had to be halted for half-an-hour. On that day, the finance ministry got in touch with the capital market regulator as well as the banking sector regulator the Reserve Bank of India to prevent any liquidity problems.
What steps has Sebi taken in the recent past to curb market volatility?
Sebi recently tightened the margining system in the cash market. The cash market margins which are based on Value at Risk (VaR) will also be updated five times a day in line with the derivatives market. The new Sebi measure will come into force from July 10 for BSE and NSE, while for the other SEs it will be implemented from August 28, 2006.
Currently, in the cash market VaR margin rate is calculated at the end of the trading day and then applied to the open positions of the subsequent trading day. However, in the derivative market, the risk parameter files for computation of the margins are updated intra-day.
The applicable VaR margin rates in the cash market will be updated at least five times a day, which may be carried out by taking the closing price of the previous day at the start of trading and the prices at 11 am, 12.30 pm, 2 pm and at the end of the trading session.
How effective are these steps likely to be?
These measures are expected to provide more safety to the cash markets which have been largely volatile in the recent past. The volatility in the market was in the wake of the sudden pull-out by the foreign players, hedge funds in particular, who made an exit from assets, be it metals, bullion or securities, fearing a rate hike by the US Federal Reserve. Sebi has decided to align the cash margining system with the aim of ensuring market safety and protecting the interests of investors.


Source: Financial express
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Re: How is the market regulated? - June 29th, 2006

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