Government of India Volume I: Analysis and Recommendations

FOUNDATIONS OF CONTRACTS AND PROPERTY
6. Storage of transaction data: The last financial crisis has highlighted the interconnected
nature of finance. When a financial market player fails, the unmet obligations
to other parties may spread risk across the financial system. While it is not
possible to move all transactions to an exchange, trade repositories for OTC transactions
have become an important infrastructure system to monitor risks during
normal times and improve interventions in times of emergency.
The Commission recommends that the Government be provided with the power to
add more services to the list of Infrastructure Institutions.
13.4. Regulatory issues of Infrastructure Institutions
The Commission found that the regulation of Infrastructure Institutions requires the regulator
to address the following six primary issues about their functioning.
1. An Infrastructure Institution must be governed in a manner which is compliant with the principles
of prudential regulation;
2. An Infrastructure Institution must also protect the interests of the persons using its services in
compliance with the principles of consumer protection;
3. Infrastructure Institutions are usually systemically important as they connect other financial service
providers and therefore systemic risk concerns require to be addressed;
4. Infrastructure Institutions sometimes enjoy considerable market influence as they provide ‘infrastructure’
services to all players and this requires the regulator to ensure that this market influence
is not used to discriminate between users;
5. Certain Infrastructure Institutions produce information which is used by the larger economy. The
release and integrity of the information needs to be maintained;
6. Certain Infrastructure Institutions should be obliged to track market abuse and enforce against
it, without diluting the requirement upon the regulator for this purpose.
The Commission recommends that Infrastructure Institutions be obliged to pursue
these six objectives alongside the regulators. Regulators must have oversight over this
rule-making process and ensure that rules are made by Infrastructure Institutions that
are consonant with the above six objectives of regulators.
13.4.1. Prudential regulation
The general micro-prudential law mandates the regulator to monitor the promises made
by financial firms in the securities sector. The Infrastructure Institutions make important
promises to the consumers like delivering securities at an agreed price, keeping record of
ownership, transferring money for financial and non-financial activities and extinguishing
claims. The failure to keep these promises will have repercussions upon consumers
and the financial system at large. Hence, regulators must enforce prudential regulation
requirements upon Infrastructure Institutions.
13.4.2. Consumer protection law
While Infrastructure Institutions may themselves not directly deal with consumers, financial
service providers usually act as intermediaries between such institutions and retail
consumers. This requires that regulators ensure that Infrastructure Institutions apply the
principles of consumer protection law. These principles will operate in a number of ways
to protect the interests of the consumer:
1. It will require the market design, that is embedded in the rules created by Infrastructure Institutions,
to be fair to consumers;
2. It will require securities advisors to judge the appropriateness of the security to the needs of the
retail consumer; and
FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION 123