Government of India Volume I: Analysis and Recommendations

FOUNDATIONS OF CONTRACTS AND PROPERTY
3. It will require sellers of securities to provide adequate information about the securities being sold
and the terms and conditions of the security to retail consumers.
13.4.3. Systemic risk
Infrastructure Institutions are usually systemically important financial institutions. Their
failure has negative consequence on the entire financial system due to the connection
services they provide between financial service providers. The rules made by Infrastructure
Institutions must thus pursue high levels of safety, and regulators must monitor such
institutions from this perspective.
13.4.4. Monopoly abuse
Contracting has taken place for millennia without the intervention of these Infrastructure
Institutions. The economic purpose of such institutions may be classified into two parts.
The first is that of reduced cost in contracting. The search cost for a counterparty goes
down by going to an exchange. Standardisation of processes is essential for the use of
electronics in securities trading, settlement, and payments.
The market power that Infrastructure Institutions enjoy are amenable to abuse. This
may arise in areas like refusing to list securities, preventing access to connections or preventing
access on neutral terms. Hence the regulator has to monitor the terms on which
the Infrastructure Institution operates. An essential element of this is the requirement
that all Infrastructure Institutions operate on predetermined rules which are approved by
the regulator so that there is no arbitrary treatment of any party accessing the services.
13.4.5. Information as a public good
The information produced by Infrastructure Institutions has wide ramifications for the
market economy. The prices of securities are utilised by the wider economy as a vital
input for making decisions about resource allocation. Hence, Infrastructure Institutions
should be required to release high quality information that will support such applications.
13.4.6. Market abuse supervision
Information produced by Infrastructure Institutions is vital to the functioning of the financial
system. It is also an input into decision making across the economy. When this information
is incorrect, it reduces the quality of decision-making across the economy, often
involving persons who are not direct participants in the financial markets. Hence, regulators
and Infrastructure Institutions must undertake initiatives that ensure the integrity
of this information. This requires blocking market abuse.
Further, Infrastructure Institutions are at the front-line of supervision on the problems
of market abuse. While the prime responsibility for enforcement against market abuse
lies with regulators, the front-line tasks of watching markets and conducting the early
stages of an investigation lie with Infrastructure Institutions. In the modern environment
with high-speed computerised trading and complex trading strategies, Infrastructure Institutions
are required to build sophisticated supervisory staff of a kind that is not easily
assembled in governmental agencies.
Product development at Infrastructure Institutions will often lead to innovative new
products being developed. While this is desirable, such institutions will also be required
to build the commensurate supervisory capacity to understand and detect abuse in tracking
billions of transactions in fast-paced information technology systems. The regulatory
124 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION