Depositories to set up risk management framework in 3 months: SEBI

The SEBI on Monday asked depositories to put in place a comprehensive risk management framework within three months.

The Depository System was reviewed by the Depository Systems Review Committee(DSRC) inter alia in the context of Principles for Financial Market Infrastructures(PFMI) laid down by the Committee on Payment and Settlement Systems (CPSS) and International Organization of Securities Commissions (IOSCO).

The FMI principles lay emphasis on the need to have a robust risk management framework to identify, monitor and manage various risks emanating from multiple sources to its operations.

The principles also emphasize that as the Board of the FMI is ultimately responsible for managing the FMIs risks, it should establish a clear, documented risk-management framework that includes the FMI’s risk-tolerance policy, assigns responsibilities and accountability for risk decisions, and addresses decision making in crises and emergencies.

The Depository Systems Review Committee(DSRC) has therefore recommended the following: "There should be a Board approved policy providing for a well documented comprehensive risk management framework at both depositories.

The risk management group/ committee should be active and meet periodically to continuously identify, evaluate and assess applicable risks in depository system through various sources such as investors complaints, inspections, system audit etc. and suggest measures to mitigate risk wherever applicable.

A Chief Risk officer should be made responsible, accountable, accessible & answerable to the board on overall risk management issues." In view of the above, the depositories are advised to establish a clear, comprehensive and well documented risk management framework which shall include the following:

a. an integrated and comprehensive view of risks to the depository including those emanating from participants, participants' clients and third parties to whom activities are outsourced etc.;

b. list out all relevant risks, including technological, legal, operational, custody and general business risks and the ways and means to address the same;

c. the systems, policies and procedures to identify, assess, monitor and manage the risks that arise in or are borne by the depository;

d. the depository's risk-tolerance policy; e. responsibilities and accountability for risk decisions and decision making process in crises and emergencies. "The depositories shall implement the provisions of this circular within three months from the date of this circular," Sebi said.

The depository system was reviewed by the DSRC in the context of Principles for Financial Market Infrastructures and International Organisation of Securities Commissions.

The principles lay emphasis on the need to have a robust risk management framework to identify, monitor and manage various risks emanating from multiple sources to its operations.