Framework for Regulatory Sandbox

IFSCA – Framework for Regulatory Sandbox 1 | P a g e CIRCULAR F. No. 71/IFSCA/CMD-RS/2020-21 October 19, 2020 To, All Stock Exchanges, Clearing Corporations and Depositories in IFSC All Intermediaries in IFSC Dear Sir/Madam, Subject: Framework for Regulatory Sandbox 1. IFSCA, with an objective to develop a world class FinTech hub at the IFSC located at GIFT City in Gandhinagar [Gujarat, India] (hereinafter referred to as “IFSC”), endeavors to encourage the promotion of financial technologies (‘FinTech’) initiatives in financial products and financial services across the spectrum of banking, insurance, securities and fund management. 2. As a step towards attaining this vision it is desirable to introduce a framework for “Regulatory Sandbox”. Under this sandbox framework, entities operating in the capital market, banking, insurance and financial services space shall be granted certain facilities and flexibilities to experiment with FinTech solutions in a live environment with a limited set of real customers for a limited time frame. These features shall be fortified with necessary safeguards for investor protection and risk mitigation. 3. The guidelines pertaining to the functioning of the Regulatory Sandbox are provided at Annexure A. IFSCA – Framework for Regulatory Sandbox 2 | P a g e 4. Further, as an additional step towards creating an ecosystem which promotes innovation in IFSC, IFSCA feels that FinTech firms should have access to market related data, particularly, trading and holding data, which is otherwise not readily available to them, to enable them to test their innovations effectively before the introduction of such innovations in a live environment. 5. With a view to operationalizing the abovementioned endeavor, IFSCA is proposing an “Innovation Sandbox”, which will be a testing environment where FinTech firms can test their solutions in isolation from the live market, based on market related data made available by the Market Infrastructure Institutions (MIIs) operating in IFSC. 6. The MIIs operating in IFSC shall put in place the necessary systems and infrastructure for operationalizing the Innovation Sandbox. 7. This circular is issued in exercise of powers conferred by section 12 of the International Financial Services Centres Authority Act, 2019 to develop and regulate the financial products, financial services and financial institutions in the International Financial Services Centres. A copy of this circular is available on the website of the International Financial Services Centres Authority (IFSCA) at https://www.ifsca.gov.in/ Yours faithfully, Praveen Kamat Deputy General Manager Email: praveen.kamat@ifsca.gov.in IFSCA – Framework for Regulatory Sandbox 3 | P a g e Annexure A APPLICABILITY 1. The following entities shall be eligible for testing in the regulatory sandbox: 1.1. All entities registered with Securities & Exchange Board of India (SEBI), Reserve Bank of India (RBI), Insurance Regulatory Development Authority (IRDA) and Pension Fund Regulatory and Development Authority (PFRDA) 1.2. All startups registered with Startup India and meeting the criteria of a start-up as defined in the Gazette notification of the Department for Promotion of Industry and Internal Trade dated February 19, 2019 or later versions 1.3. Companies incorporated and registered in India 1.4. Companies incorporated and regulated in Financial Action Task Force (FATF) compliant jurisdictions by a financial services or banking or capital market or insurance or pensions regulator and who are having subsidiaries/ branch offices / representative offices in IFSC 1.5. Individuals who are citizens of India 1.6. Individuals from FATF compliant jurisdictions ELIGIBILITY CRITERIA FOR THE PROJECT 2. The eligibility criteria shall be as follows: a) Genuineness of innovation The solution should be innovative enough to add significant value to the existing offering in the capital market, banking, insurance or pensions sector in India/IFSC. b) Genuine need to test The applicant should have a genuine need for live testing the solution on real customers. Further, the applicant should demonstrate that the solution cannot be developed without relaxing certain regulations, if any, being sought. IFSCA – Framework for Regulatory Sandbox 4 | P a g e c) Limited prior testing Before applying for testing in sandbox, limited offline testing of the solution should have been carried out by the applicant. d) Direct benefits to users The solution should offer identifiable benefits (direct or indirect) to the investors or entities or to the capital market at large. e) No risks to the financial system The solution should have proper risk management strategy to incorporate appropriate safeguards to mitigate and control potential risks to any market participants/users that may arise from the testing of the solution and shall propose appropriate safeguards to manage the risks and contain the consequences of failure. f) Testing readiness of the solution The applicant should have the necessary resources to support testing in the sandbox and must demonstrate well developed testing plans with clear objectives, parameters and success criteria. g) Deployment post-testing The applicant should demonstrate the intention and ability to deploy the solution on a broader scale. To this effect the applicant should share a proposed sandbox exit and transition strategy. APPLICATION AND APPROVAL PROCESS 3. The applicant shall ensure that the specified eligibility criteria are satisfied while submitting the application as per Annexure-1 to IFSCA. The application form shall be signed by: 3.1. the Chief Executive Officer (CEO) of the applicant or officer duly authorized by the CEO or compliance officer in the case of a company or startup. 3.2. In case of an individual applicant, the individual himself IFSCA – Framework for Regulatory Sandbox 5 | P a g e 4. If an individual applicant is a student, a certificate issued from Institute/University Dean’s Office for permission to apply for Regulatory Sandbox, should be submitted along with the application. 5. The complete application must be submitted to: Executive Director, International Financial Services Centres Authority (IFSCA) 2nd Floor, Savvy Pragya, Gujarat International Finance Tec-City Gujarat 382355 or by email at praveen.kamat@ifsca.gov.in 6. The flowchart for the application and approval process is depicted at Annexure-2. IFSCA shall communicate with the applicant during the course of evaluation of the sandbox application, and during the testing phase. 7. At the “Application Stage”, IFSCA shall review the application and inform of its potential suitability for a sandbox within 30 working days from the submission of the complete application. IFSCA may issue guidance to the applicant according to the specific characteristics and risks associated with the proposed solution. 8. At the “Evaluation Stage”, IFSCA shall work with the applicant to determine the specific regulatory requirements and conditions (including test parameters and control boundaries) to be applied to the proposed solution in question. The applicant shall then assess if it is able to meet these requirements. If the applicant is able and willing to meet the proposed regulatory requirements and conditions, the applicant shall be granted permission to develop and test the proposed FinTech innovation(s) in the sandbox. 9. Upon approval, the application shall proceed towards the “Testing Stage”. The participant shall disclose to its users that the solution shall operate in a sandbox and the potential key risks associated with the solution. The applicant is also required to obtain the user’s acknowledgement that they have read and understood the risks. IFSCA – Framework for Regulatory Sandbox 6 | P a g e 10. During the testing stage, the applicant shall take prior approval from IFSCA to effect any material changes to the solution. 11. Each applicant shall assign a contact person to coordinate with a designated officer of IFSCA. 12. The duration of the sandbox testing stage shall be a maximum of twelve months and extendable upon request of the applicant. 13. In case an application is rejected at any stage, the applicant shall be informed accordingly. The reasons for rejection could include failure to meet the objective of the sandbox or any of the eligibility criteria. The applicant may re-apply for the sandbox when it is ready to meet the objective and eligibility criteria of the sandbox, subject to an appropriate cooling off period as decided by IFSCA.