Sebi working to mitigate cyber risks

Mumbai: The Securities and Exchange Board of India (Sebi) is working on a system to mitigate the risk of cyber attacks on stock exchanges, its chairperson Madhabi Puri Buch said on Friday.

"We are all worried about cyber security. We ensure that all our exchanges have a good disaster recovery plan in place. But nothing accounts for software breakdown," said Buch at an event organised by Indian Institute of Management (IIM) Bangalore. "In a cyber security attack, it's your software that gets attacked. Through a transmission, your disaster recovery site will also get contaminated."

Under the proposed system, all trade data of clients with one exchange will be stored at servers of the other exchange in their data center. This will ensure that in case of any cyber attack it does not affect the smooth functioning of the market.


"If exchange A were to go down and if Sebi determines this is on account of a cyber attack and it is not going to be possible for the exchange's disaster recovery site to come up on time, Sebi will press the button for that data to be uploaded on exchange B's systems so that every participant in the market will be able to participate as if it was operating on exchange A," said Buch.

The Sebi chief said the new system will go live by around March of next year. "This has never been done anywhere in the world and we will be the first to do this," Buch said.

ALGO MARKETING RESTRICTIONS
Buch said the regulator has put in place rules on algorithms that restrain brokers from promoting any past performance for retail investors.

This is because algorithm service providers have not been able to prove their track record to Sebi or stock exchanges.

"Unlike a mutual fund, where past performance is audited and proved and there is disclosure to back up that performance, in the case of algorithms there is no such thing," Buch said.

"We have told the industry that we are open, the day you come up with a mechanism, we are ready to support you. But until then you cannot show any kind of performance."

The Sebi chairperson also said the regulator is working on developing algorithms that will help it to catch violations of the ‘spirit’ of the law by mutual funds.

Sebi has already put in place 80 algorithms that manifest its law, that can detect any violation of the letter of the law by mutual funds.

“How do you catch mis-selling? There is no formula to catch mis-selling by a mutual fund. So how do you develop an algorithm which will help us catch the violation of the spirit of the law not just the letter of the law? This is what we are engaged with at the moment and in a few months we will have something to show for it,” Buch said.

On cracking down on insider trading and front-running, the Sebi chief said,” The reality is that the regulator will, unfortunately, be one step behind but hopefully not too many steps behind.”

She said the regulator looked at call data records to track insider trading and front-running. But then, people moved to Whatsapp - which was a problem. Eventually, they started leveraging the ‘vanishing’ feature of WhatsApp - this was a bigger problem. Thus, Sebi always had to catch up with the ways individuals did insider trading and front- running.

“The idea is to make it harder and harder for people to do wrong things.”