Guidelines for inspection of Depository Participants (DPs) by Depositories
Summary
This circular mandates depositories to establish a comprehensive framework for inspecting Depository Participants (DPs) based on DSRC recommendations. It requires depositories to implement specific inspection areas, risk rating models, and sample size determination methodologies. Additionally, it outlines procedures for joint inspections, off-site monitoring, and the categorization of DPs into risk tiers. This section outlines the scope of inspection areas including transactions, compliance with PMLA, IT security, and various operational procedures like pledges and account transfers. It details the adaptive sample size determination methodology for inspecting specific activities such as account openings, DIS processing, and client data modifications. The methodology applies risk-based multipliers to base sample sizes to determine the final number of samples for verification by SEBI inspectors. This section details the calculation methodology for DP Rating, comprising Quantitative and Qualitative scores. The Quantitative Score is derived from inspection areas and complaints received using specific weights assigned by depositories. The Qualitative Score assesses factors such as gover
Text
Depositories shall ensure the following while inspecting their DPs.
For conducting inspection of DPs, depositories shall inspect the areas as mentioned in Annexure - I. During inspection, depositories shall cover implementation of circulars / guidelines issued by SEBI and guidelines / operating instructions / directions by depositories in respect of these areas. In addition, Depositories may include such other areas as felt appropriate.
For the purpose of determining the size of sample, depositories shall be guided by 'Adaptive Sample Size determination methodology' as mentioned at Annexure - II.
For the purpose of computing total risk score of DPs, depositories shall be guided by “DP Rating Model / Categorization” as mentioned at Annexure – III.
Depositories shall assign risk weights for each of inspection areas after taking into consideration following factors: Operational risks in each of the inspection areas; Category of DPs (such as stock broker DPs, bank DP, etc); Size of Operation; Repetitive violations; IT Security and BCP; Complaints received and redressed.
Depositories shall arrive at a Quantitative Risk Score for each inspection area by multiplying percentage of non-compliance to the sample size with the corresponding assigned risk weight.
Depositories shall arrive at a Qualitative Risk Score for each qualitative area by multiplying the score assigned by inspection team to DP with corresponding assigned risk weight.
Total DP Risk Score shall be the summation of quantitative and qualitative scores assigned to the DP.
Depositories shall suitably normalize the scales of the qualitative and quantitative scores in arriving at the Total DP risk score.
Depositories shall categorize their DPs as 'High Risk', 'Medium to High Risk', 'Medium Risk', and 'Low Risk' DPs based on the percentile of risk score.
After arriving at the risk rating / categorization as mentioned above, for subsequent inspections, depositories shall use the DP risk rating / categorization to decide on the frequency of inspection of DPs.
Apart from the above, depositories may undertake specific purpose inspections for DPs which score high in the specific inspection areas as mentioned at Annexure - I.
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Source: SecMarx — Guidelines for inspection of Depository Participants (DPs) by Depositories. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.