SEBI plans to invest heavily in Artificial Intelligence and Machine Learning: Know why?

An Overview

SEBI plans to invest big in technology in order to upgrade its monitoring capabilities, investigation, and policy-making capabilities. SEBI will deploy key information technology projects in the next few years that are critical to its day-to-day operations and mandate, according to the capital market regulator’s annual report for 2020-21.

SEBI stated that it intends to use artificial intelligence, machine learning, and rule-based algorithms to create various analytical models. On its Data Lake platform, the agency plans to implement analytics based on unstructured data. “These will be used by SEBI’s many operational departments for surveillance, investigations, and inspections on the one hand, and policy-making and application processing on the other,” the regulator stated.

Given the recent increase in cyber theft and hacking incidents affecting financial market organisations, SEBI stated that it would start dataload procedures on all of its information technology systems.

Further Key Takeaways

SEBI will also initiate foreign load testing of MIIs’ public webpages and choose securities market intermediaries’ websites in order to proactively advise these firms on cybersecurity, according to the regulator.

The market regulator said it would utilise technology to replicate human intelligence to improve its fraud alert system in an effort to better integrate technology into its regulatory process. The Indian capital market currently processes over 550 crore daily orders, making data the backbone of the country’s financial sector. According to the regulator, “the future of monitoring will require further deployment of technology to detect more intricate and changing manipulation techniques by fraudsters.”

SEBI has developed a special division for automating mutual fund inspections, demonstrating the growing use of technology in monitoring. “The division aspires to expand the number of alerts available and to cover the whole range of quantitative aspects of inspections. In addition, in-spirit infractions will be recognised and added to the surveillance system,” SEBI stated.

Consequences for blunders: SEBI’s stance is clear

Because the regulator, the Securities and Exchange Board of India, has implemented a new penalty system and processes to tackle technical malfunctions, stock exchanges, depositories, and clearing organisations will now be held accountable for their treatment of them. Authorities should, however, work on a mechanism for compensating retail investors in the event of errors.

With a growing reliance on technology, the market infrastructure institutions (MIIs) have fully automated their operations and functions, from order entry to order matching to transaction confirmation, all the way to clearing and settlement of trades. However, according to SEBI, there have been instances of technical problems resulting in business disruption or service unavailability.

Failure in the technology

Despite many procedures mandated by SEBI, such as business continuity planning, disaster recovery strategies, system audit, and so on, the glitches persist, according to the regulator, who issued a standard operating procedure.

According to SEBI, a technical glitch is any failure, whether it is hardware, software, or any of the MII’s products/services, that causes the system’s usual functions or operations to cease or vary. Technical problems are nothing new around the world, but the incident on February 24 at the National Stock Exchange (NSE) created a lot of worry, heartburn, and loss for investors, exposing the susceptibility of our trading systems.

The problem was caused by a storage area network failure. Following this, SEBI reduced the time required for MII to declare a catastrophe from two hours to 30 minutes, and the time required to resume operations after the disaster declaration was reduced from two hours to 45 minutes.

Monetary constraint

To make the system watertight, SEBI has stated that if the MII fails to declare catastrophe within the specified dates, it will face a financial penalty of 10% of its median net earnings for the last 2 years, or two crore rupees, whichever is greater. In addition, the managing director and chief technology officer will be required to pay 10% of their yearly salary for the fiscal year in which the tragedy happened.

MIIs will have to pay a fee of Rs. 1 lakh per day if their root cause analysis is late or incomplete, according to the new framework. Failure to resolve the technical issue within 15 working days would result in a penalty of Rs. 2 lakh per day for the first 15 working days, Rs. 3 lakh for the next 15 working days, and Rs. 25 lakh for the remaining 15 working days.

The initiatives of SEBI are to be applauded. Exchanges and other middlemen will now be required to closely monitor their systems and undertake frequent audits. To keep up with the dynamic scaling up of order sizes and volumes in the Indian market, these institutions must also invest in infrastructure and systems. Interoperability must also be enhanced by exchanges.