Direct Market Access (DMA) facility

1 | P a g e CIRCULAR IFSCA/CMD-DMIIT/EXCHTRD/2023-24/001 June 21, 2023 To, All the Stock Exchanges in the International Financial Services Centre (IFSC) All the Broker-Dealers in the International Financial Services Centre (IFSC) Dear Sir/Madam, Sub: Direct Market Access (DMA) facility 1. Direct Market Access (DMA) is a facility which allows Broker-Dealers to offer their clients direct access to the trading system of the Stock Exchange, through the Broker-Dealer’s trading systems, without any manual intervention by the Broker-Dealer. The Broker-Dealer retains the ability to monitor internally and, if necessary, stop an order prior to it being executed. 2. The Broker-Dealer shall maintain sound audit trail for all DMA orders and trades and should at all times have the capability to provide identification of actual user-id for all such orders and trades. The audit trail data should be available for at least 10 years, from the date of execution of trades. 3. The Broker-Dealers shall follow the similar logic/priorities used by the Exchange to treat DMA client orders. In this regard, the Broker-Dealers are required to maintain all activities/ alerts log with audit trail facility. The DMA Server shall have internally generated unique identifier for all such client order/trades. 4. The Stock Exchange shall have the operational flexibility to put in place the necessary measures, procedures and guidelines for DMA orders and trades with respect to: a. Risk management and risk mitigation with respect to DMA trading activity b. Technology and systems audit policy of the DMA systems based on the risk profile of the Broker-Dealer / client. c. Eligible institutional investors which are permitted to avail the DMA facility d. Cybersecurity, cyber resilience, access control and incident response 2 | P a g e Responsibilities of the Broker-Dealer & due diligence of prospective clients 5. The Broker-Dealers shall specifically authorize prospective clients for providing DMA facility subject to: a. Fulfilment of the KYC/AML requirements as specified by IFSCA from time to time b. Due diligence of the prospective client with respect to the credit worthiness, risk taking ability and track record of compliance c. The governance and ownership structure of the prospective client d. The ability of the prospective client to meet its financial obligations e. Any additional measures that the Stock Exchange considers appropriate to ensure that the clients are deemed fit and proper for permitting access to the DMA facility. 6. The Broker-Dealers are required to maintain proper records of such due diligence. Individual users at the client end shall also be authorized by the Broker-Dealer based on minimum criteria. The records of user details, user-id and such authorization shall be maintained by the Broker-Dealer. Details of all user-ids activated for DMA shall be provided by the Broker- Dealer to the Stock Exchange. 7. The Broker-Dealer shall enter into a specific agreement with the clients for whom they permit DMA facility, the nature and detail of which should be appropriate to the nature of the service provided. This agreement shall, inter alia, include the following safeguards: a. The DMA facility shall be used by the client only to execute its own trades and shall not be used for transactions on behalf of any other person/entity. b. The necessary systems and controls with respect to Electronic/Automated Risk Management shall be in place at the Broker-Dealer’s level before the release of order to the Exchange trading system. The client shall agree to be bound by the various limits that the Broker-Dealer shall impose for the usage of the DMA facility. c. Right to withdraw DMA facility if the predefined thresholds are breached or for any other such concerns d. Withdrawal of DMA facility on account of any misuse or on instructions from IFSCA or the Stock Exchange. 3 | P a g e The Stock Exchange may put any other terms and conditions to be included in the agreement with the clients. The Broker-Dealer’s agreement with its clients shall not have any clause that is in contravention to the regulations/circulars/guidelines issued by IFSCA and the Stock Exchange from time to time. 8. The Broker-Dealer shall: a. ensure that the trading limits, exposure limits and position limits are set for all its DMA clients based on risk assessment, credit quality and available margins of the client. b. Have appropriate authority levels to ensure that these limits are established only by persons authorized by the Chief Risk Officer or Chief Compliance Officer or any other such senior employee of the Broker-Dealer authorized to have oversight over the Compliance or Risk Management functions. c. Ensure that all DMA orders are routed through electronic/automated risk management systems of the Broker-Dealer to carry out appropriate validations of all risk parameters including Quantity Limits, Price Range Checks, Order Value and Credit checks before the orders are released to the Exchange. d. The Broker-Dealer may provide for additional risk management parameters as they may deem appropriate. Introduction of Sponsored Access (SA) facility 9. Based on the representations received from the Stock Exchanges and market participants, in order to enhance market participation and broaden the investor base in IFSC, it has been decided to permit Broker-Dealers to offer the facility of Sponsored Access (SA) to its clients, for trading on the Stock Exchange. 10. Sponsored Access is a form of Direct Market Access in which the Broker-Dealer permits its client to transmit orders directly to the Exchange trading system without routing it through the Broker-Dealer’s trading system. Such an arrangement may facilitate low latency trading and assist in preserving the confidentiality of sophisticated, proprietary trading strategies of the clients. 11. The Broker-Dealer shall sign a SA agreement or provide a SA undertaking to the Stock Exchange. 4 | P a g e 12. The orders routed through the client’s trading application via SA should pass through the controls / pre-trade risk management layer provided by the Stock Exchange with the parameters being determined and configured by the Broker-Dealer. 13. The Broker-Dealer shall enter into an agreement with the clients desirous of availing the SA facility. The due diligence by the Broker-Dealer for providing SA to such clients shall, inter alia, include: a. the governance and ownership structure of the client b. the responsibilities within the client for dealing with actions and errors c. the historical trading pattern and behaviour of the prospective client d. the level of expected trading and order volume of the prospective client e. the ability of the prospective client to meet its financial obligations f. the disciplinary history of the prospective DMA client, where available The Stock Exchange shall ensure that the agreement between the Broker-Dealer and its client are in place prior to approving the facility of SA. Sub-delegation of DMA/SA 14. A client of a Broker-Dealer may sub-delegate its DMA/SA facility to its own client (sub- delegatee), subject to the condition that the client sub-delegating the DMA/SA facility is an entity, regulated in any capacity, by a securities market regulator which is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (IOSCO-MMoU). 15. The Broker-Dealer permitting a DMA/SA client to sub-delegate its DMA/SA facility, should be able to identify the different order flows from such sub-delegation. 16. Only one level of sub-delegation of DMA/SA facility shall be permitted i.e., sub-delegation shall be permitted only up to a client’s client (sub-delegatee). The sub-delegatee shall not be permitted to in turn sub-delegate the DMA/SA facility to its client.