Regulatory framework for Execution Only Platforms for facilitating transactions in direct plans of schemes of Mutual Funds
Summary
This circular establishes a regulatory framework for Execution Only Platforms (EOPs) to facilitate transactions in direct plans of Mutual Fund schemes. It defines two categories of EOPs, requiring registration with either AMFI or SEBI-registered Stock Brokers depending on the model. The document outlines eligibility criteria, onboarding procedures, and fee structures while exempting Category 2 EOPs from certain stock exchange rules. This section outlines operational risk management, grievance redressal, and conflict of interest protocols for Execution Only Platforms. It details technology requirements for transaction execution and data infrastructure across Category 1 and 2 entities. Finally, it establishes disclosure standards, fund pooling restrictions, and record-keeping obligations. Section 13 mandates that existing platforms similar to Category 1 EOPs must obtain registration within three months, while Market Infrastructure Institutions must ensure compliance with the framework. Annexure A1 specifies nine minimum disclosure requirements for mutual fund schemes offered on Electronic Operating Platforms. Annexure A2 lists the specific books of account and records that Category 2
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It has been observed that various SEBI registered Investment Advisors/Stock Brokers provide execution services in direct plans of Mutual Fund schemes through their technology/digital platforms... Thus, while the investors may find it convenient to avail the services of such online platforms, investors who are not clients of such intermediaries under the above specified Regulations may not have recourse or protection for the risks associated with respect to such transactions.
Pursuant to public consultation and discussions in the Mutual Funds Advisory Committee, it has been decided to prescribe a framework for Execution Only Platforms for transacting in direct plans of schemes of Mutual Funds. In this regard, the SEBI (Stock Brokers) Regulations, 1992 have been amended and notified on January 17, 2023.
The Stock Exchanges shall enact appropriate framework for EOP segment wherein the following requirements shall not be applicable for Category 2 EOP: trading rules applicable for equity, equity derivative and other segments; Investor Protection Fund; rules applicable for clearing and settlement... pooling of client’s funds by Trading Member... risk management framework... issuance of contract notes and issuance of funds & securities statement.
The Stock Exchanges desirous of providing an EOP segment are directed to: make necessary arrangements to their relevant bye-laws, rules and regulations for the implementation of the directions in this circular and provide status of implementation regarding the same to SEBI on a monthly basis; and monitor the operations carried out by EOPs who have obtained membership under EOP segment.
The AMFI is directed to: make necessary amendments for the implementation of the directions in this circular and provide status of implementation regarding the same to SEBI on a monthly basis; and issue necessary guidelines for Category 1 EOP before the date of this circular coming into force. monitor the operations carried out by EOPs registered with AMFI.
This circular shall come into force with effect from September 01, 2023.
This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of, and to regulate the securities market.
An EOP for facilitating transactions in direct plans of schemes of Mutual Funds, shall mean: Any digital or online platform which facilitates transactions such as subscription, redemption and switch transactions in direct plans of schemes of Mutual Funds.
The platforms provided by SEBI registered Investment Advisors and Stock Brokers to their advisory or broking clients shall not be covered under the EOP framework.
No entity shall operate as an EOP without obtaining registration from SEBI or the AMFI, as the case may be and in the manner specified herein.
The entity shall also facilitate non-financial transactions including change of email id or contact number or bank account details on its platform with respect to Mutual Funds.
The entity shall not provide services related to regular plans of schemes of Mutual Funds on its platform.
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Source: SecMarx — Regulatory framework for Execution Only Platforms for facilitating transactions in direct plans of schemes of Mutual Funds. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.