SEBI Brings New Framework for Liquidity Enhancement Schemes

On Wednesday, market regulator SEBI (Securities and Exchange Board of India) revised the liquidity enhancement scheme (LES) framework that stock exchanges use to boost volumes. So, under this new rule, stock exchanges will have to get prior approval from their governing board before launching a scheme. SEBI said in a circular that this modification was made based on stock exchanges experiences.

Moving ahead.

SEBI’s Tweak on LES Framework: All You Need to Know

Previously, in 2014 the market regulator had allowed stock exchanges to bring liquidity enhancement schemes in equity derivatives and equity cash segments to boost liquidity in illiquid securities.

Meanwhile, in this new rule, SEBI mentioned that stock exchanges could introduce LES on any security. It further said that stock exchanges could reintroduce this scheme once on the same security after the scheme ceases.

Earlier SEBI had allowed stock exchanges to bring forth LES schemes on any security, but for a maximum period of 3 years. To elaborate, stock exchanges could reintroduce this scheme on the same security after scheme discontinuation, only if it was less than 3 years since the scheme’s introduction on that security.

Adding further, SEBI said that the governing body’s approval of stock exchanges would stay valid for only one year. It also mentioned that the government body might further keep on providing approval on a yearly basis until this scheme continues operating.

Prior to this modification, stock exchanges needed early approval from the board to introduce LES schemes. Further, the board monitored the outcome and implementation of this scheme at quarterly intervals.

SEBI’s Instruction for Stock Exchanges

The market regulator mentioned that this modification is also applicable to all existing schemes. Meaning, every other condition written in the 2014 SEBI circular will not change.

Furthermore, SEBI instructed stock exchanges to:

• Formulate new steps and employ critical systems for the successful implementation of this modification.
• Initiate newer amendments to the rules and regulations and the applicable bye-laws to implement this decision properly.
• Guide this circular’s provisions to notify stock exchanges and their brokers and trading members. They should also circulate the same on its particular website.

Bottom Line

SEBI introduced the Liquidity Enhancement Scheme to increase liquidity in illiquid derivatives and equity cash. Since its introduction, the scheme has significantly helped in bringing down the impact cost for trading. For instance, BSE has successfully used this scheme to boost volume for its derivative segment. Now, with this enhancement in the LES framework, let’s hope that it ensures liquidity management with greater effect.

Frequently Asked Questions

1. What isLiquidity Enhancement Schemes?

Under the LES scheme, market intermediaries and brokers get incentives for a specific period to generate liquidity and investor interest in securities that generally have a limited trading activity.

2. How are the incentives for LES paid?

Incentives are paid in the form of discounts, adjustments or warrants, or options of stock exchanges within the given limits.

3. What isthe Liquidity Enhancement Schemes that stock exchanges can adopt?

Stock exchanges can adopt all LES schemes such as market maker, market taker, and liquidity provider.