India – SEBI Notifies Guidelines For Outsourcing Of Activities By Stock Exchanges And Clearing Corporations.

Outsourcing of “Core Activities”

Control to remain with exchange / clearing corporations

In case a “Core Activity” of a Stock Exchange/ Clearing Corporation i.e. any activity which is crucial to the overall functioning of the stock exchange e.g. the software platform of an exchange, data management for the exchange, network security, information technology solutions etc., is outsourced to a specialist, the responsibility and control of such service shall wholly rest with the exchanges and clearing corporations.

It should thus be evaluated and ensured that none of the services including ancillary services constitute “core activity.

Source Code for software being used for Core Activities to remain in escrow with the exchange/clearing corporation

Service Providers who provide trading and/or clearing software i.e. software crucial to the Core Activities must enter into an escrow arrangement with the exchanges/clearing corporations to keep the source code in escrow, such that in case of any issue with the vendor, the software can be taken out of escrow and used to continue the business.

Due Diligence

Factors to be considered while conducting Diligence on a Service Provider

The Service Provider shall be subject to appropriate level of diligence by the stock exchange of the clearing corporation.

Diligence to be periodic

In addition to the diligence prior to award of contract, the Service Provider shall be subject to periodic diligence.   

Contracting

Exchanges/ clearing corporations to enter into legally enforceable written agreements with all Service Providers

Exchanges and clearing corporations shall enter into written “Outsourcing Agreements” (“Agreement”) The Agreement should ensure that the power of the board and management is not diminished in any manner. The Agreement should include:

1. relationship between the parties;
2. functions of each party, obligations and responsibilities of each party;
3. potential conflict of interests between parties;
4. dispute resolution mechanism specifying the resolution process;
5. confidentiality provisions;
6. access of information provisions specifying that certain relevant information/ internal records of the Service Provider may be accessed by the exchanges/ clearing corporations and/or SEBI if deemed relevant for the purposes of outsourcing;
7. provisions for emergencies/ back-up provisions;
8. events of default and the indemnities, remedies and recourse of the respective parties; and
9. Events that shall trigger terminations, termination process, and process for handover of operations by the Service Provider to the exchange/ clearing corporation, on termination.

Risk and Risk Mitigation Strategy

The Agreement shall have appropriate terms which address risks that have been identified at the diligence stage through risk mitigation strategies that have been agreed to between parties.

Exchange/ Clearing Corporation to have right to renegotiate, renew, and intervene

The Agreement shall have appropriate terms which allows the exchange/ clearing corporation shall have a right to renegotiate the contract and shall also have the right to renew the contract at its option. The exchange/ clearing corporation shall also have a right to intervene in the workings of such Service Provider to ensure compliance with law governing such exchange/ clearing corporation.

Sub-contracting

1. Sub-contracting shall be restricted subject to consent of the exchange / corporation and after ensuring appropriate safeguards

Emergency & Back-up

The Service Provider shall establish and maintain emergency procedures and a plan for business continuity / disaster recovery, with periodic testing of backup facilities.