SEBI Board Meeting: Regulator Approves Collective Oversight Of Credit Rating Agencies And An Exchange On Algos

Markets regulator Securities and Exchange Board of India on Wednesday approved a proposal to recognise a "Past Risk and Return Verification Agency" to help regulated entities market their services to investors using verified risk-return metrics.

Under this new framework, a credit rating agency will act as the agency, with a recognised stock exchange serving as the data centre for it.

It had been previously reported by NDTV Profit that the regulator had likely finalised the framework to regulate algorithm-based trading, which works on putting future return strategies based on past performance.

Profit had mentioned that the regulator may allow qualified credit rating agencies to serve as performance validation agencies for these strategies. Additionally, it was reported that NSE is expected to be responsible for maintaining a data centre related to the validation process.

The primary function of this CRA plus verification agency will be to verify the risk-return metrics for investment advisors, research analysts, algorithmic trading entities, and others authorised by SEBI to offer such services. However, it was clarified that the verification of risk-return metrics will only apply prospectively, beginning from the date of opting for the agency’s service.

Initially, the agency will operate on a pilot basis for a period of two months. During this period, the agency will gather feedback from stakeholders and refine its technological systems and processes to ensure a stable and efficient experience.

After this fine-tuning phase, the agency will become fully operational for the entities mentioned. Participation in the agency’s services will be voluntary, and it will not be required for those who do not wish to make claims about their past risk-return metrics.