Onboarding of Remote Trading Participants by IFSC Stock Exchanges

On April 3, 2024, the International Financial Services Centre Authority (“IFSCA”) issued a Circular on Remote Trading Participants (IFSCA/CMD-MIIT/RTP/2023-24/001) (“Circular”).[1] Through this, foreign entities, not having a physical presence in the International Financial Service Centres (“IFSCs”), are permitted to directly trade on IFSC stock exchanges without a broker-dealer. These entities are called Remote Trading Participants (“RTPs”). This article will break down the Circular, discuss the eligibility criteria for RTPs, permissible transactions for RTPs, the preventive steps taken by the IFSCA against money laundering, etc., and the role of the stock exchanges in the functioning of RTPs.   

Eligibility for onboarding as RTPs

The foreign entity has to be a body corporate incorporated outside India. It must be a resident of a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (IOSCO-MMoU) or a signatory to the bilateral Memorandum of Understanding (MoU) with IFSCA. Only those entities that are members of any of the specified stock exchanges for at least a year are eligible to be qualified as an RTP. As per the Circular, the members of certain stock exchanges in the United States of America, Japan, South Korea, the United Kingdom (excluding British Overseas Territories), France, Germany, Canada, Singapore, Taiwan, Israel, Australia, United Arab Emirates, and the Netherlands are allowed to be RTPs. The IFSCA is empowered to add any other stock exchanges to this list.

Permissible trading

As an RTP, the entity is only allowed to trade on a ‘proprietary basis’. This means that an entity will only be allowed to trade for themselves and will not be allowed to onboard any client and conduct trade on behalf of any clients. Since the physical delivery of securities is difficult for an entity that does not have a physical presence, an RTP is only allowed to transact in ‘cash-settled derivative products’ on the stock exchanges. 

Agreement with IFSCA-registered clearing members

The entity shall be required to enter into an agreement with an IFSCA-registered clearing member for clearing and settlement of its transactions. Even a foreign entity can be clearing members under IFSCA through a branch office established in IFSC (Circular No. F.       No. 113/IFSCA/CMD-TMCM/2020-21).

Protection against money laundering

Certain protective measures are laid down in the Circular, against money laundering and terrorist financing. For this, the stock exchanges onboarding an RTP should ensure compliance with the IFSCA (Anti Money Laundering, Counter Terrorist-Financing and Know Your Customer) Guidelines, 2022. In addition to this, an entity that is resident of a country which in the public statement of the Financial Action Task Force (“FATF”) has been identified as i) a country having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply, or ii) a country which has had deficiencies and has not made sufficient progress in addressing them or has not committed to an action plan developed with the FATF, are not eligible to be RTPs.  

Role of IFSC stock exchanges

To onboard an RTP, the IFSC stock exchanges are given the duty to specify the terms and conditions such as risk management measures, code of conduct, net-worth criteria, security deposit, application fee, annual fee, and any other additional conditions. The onus is on these IFSC stock exchanges to ensure RTP’s compliance with the conditions prescribed under the Circular. Further, the IFSC stock exchanges are required to provide a status update on implementation of this Circular in the Monthly Development Report.

Comments

Allowing foreign entities to directly trade without having a physical office would ease the process of trading, as it would eliminate the overhead and operational costs involved in setting up a new entity or a branch office in IFSC. This will boost the number of participants in the secondary market. Overall, the decision will further improve the ease of doing business and attract more foreign investments.  

As an RTP, the entity is only allowed to trade on a ‘proprietary basis’. This means that an entity will only be allowed to trade for themselves and will not be allowed to onboard any client and conduct trade on behalf of any clients. Since the physical delivery of securities is difficult for an entity that does not have a physical presence, an RTP is only allowed to transact in ‘cash-settled derivative products’ on the stock exchanges. 

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