On March 31, 2022, International Financial Services Centres Authority has issued a circular notifying the guidelines for liquidity enhancement scheme for all Stock Exchanges in IFSC.
Key points:
Introduction of Liquidity Enhancement Schemes
The Stock Exchange may introduce liquidity enhancement schemes in any security/ listed products subject to the following:
- The scheme shall have the prior approval of the Governing Board of the Stock Exchange and its implementation and outcome shall be monitored by the Board at quarterly intervals.
- The scheme shall be objective, transparent, non–discretionary and non–discriminatory.
- The scheme shall specify the incentives available to the market makers / liquidity providers and such incentives may include discount in fees, adjustment in fees in other segments, cash payment or issue of shares, including options and warrants.
- The scheme shall not compromise market integrity or risk management.
- The effectiveness of the scheme shall be reviewed by the Stock Exchange every six months and the Stock Exchange shall submit half–yearly reports to IFSCA.
- The scheme, including any modification therein or its discontinuation, shall be disclosed to the market atleast 15 days in advance.
- Outcome of the scheme (incentives granted and volume achieved – market maker wise and security wise) shall be disseminated monthly.
Securities eligible for Liquidity Enhancement Schemes
The Stock Exchanges shall formulate their own benchmarks for selecting the securities for liquidity enhancement with the broad objective of enhancing liquidity in illiquid securities.
- The Stock Exchanges shall introduce liquidity enhancement schemes on any security for a maximum period of five years. Once the scheme is discontinued, the scheme can be re– introduced on the same security provided it is less than the five year period since the introduction of scheme on that security.
- Further, a Stock Exchange may introduce liquidity enhancement schemes in securities where liquidity enhancement scheme has been introduced in another Stock Exchange. Such schemes cannot be continued beyond the period of liquidity enhancement schemes of the initiating Stock Exchange.
- The list of securities eligible for liquidity enhancement shall be disseminated to the market.
Market Integrity
The Stock Exchange shall ensure the following:
- The Stock Exchange shall have systems and defined procedures in place to monitor collusion between stock brokers indulging in trades solely for seeking incentives and prevent payment of incentives in such cases.
- Incentives shall not be provided for the trades where the counterparty is self, i.e., same Unique Client Code (UCC) is on both sides of the transaction.
Market maker / liquidity enhancer
The exchange shall prescribe and monitor the obligations of liquidity enhancers (liquidity provider, market–maker, maker–taker or by whatever name called)
- All market maker / liquidity enhancer orders / trades should be identifiable by the Stock Exchange
- A conflict of interest framework shall be put in place by the Stock Exchange for the liquidity enhancement scheme. Such a framework shall provide for obligation on the part of the market maker / liquidity enhancer to disclose any conflict of interest while participating in the scheme. The same shall be disclosed by the Stock Exchange on their
website.
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