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In its February 2024 statement on development and regulatory policies, the Reserve Bank of India (RBI) recognised the ¡°increased integration¡± of the foreign currency markets, both onshore and offshore and an increase in the diversity of financing products available. In particular, it observed an increase in requests to access electronic trading platforms (ETP) in permitted Indian rupee (INR) products specifically for executing transactions in regulated financial instruments. The statement reported that under the existing regulatory framework, 13 ETPs run by five operators have been authorised. The statement also foreshadowed the issue of a draft regulatory framework on ETPs for public feedback. This was indeed followed by draft directions on ETPs being posted on the RBI¡¯s website for this purpose.

The draft directions define an ETP as an electronic system other than a stock exchange, on which contracts and trades for eligible instruments such as securities, money market instruments, foreign currency instruments and any other instruments specified by the RBI can be entered into. No resident or offshore entity may operate an ETP without the prior authorisation of, or registration with the RBI. An ETP operator is defined as an entity authorised by the RBI to operate an ETP. An ETP operator registered with or authorised by the RBI must ensure that only transactions approved by the RBI are entered into on the ETP.

The draft directions emphasise that an ETP operator must identify and disclose related party conflicts of interest to the RBI, and must also provide a ¡°fair, non-discriminatory and transparent¡± fee structure to its members.

A domestic ETP operator must be a company incorporated in India with its shareholding complying with the Foreign Exchange Management Act, 1999. Either the entity applying to the RBI for authorisation or its key managerial personnel must have at least three years of experience in operating trading infrastructures in financial markets. Additionally, an ETP operator must have a minimum net worth of INR50 million (USD600,000).

An offshore ETP operator must be a company incorporated in a location that is a member of the Financial Action Task Force. Either the ETP operator or the transactions conducted on the offshore ETP must be regulated by the financial markets regulator of the country where the operator is incorporated or where the transactions are entered into. The financial markets regulator of the country where the operator is incorporated must be a member of the Committee on Payments and Market Infrastructures or the International Organisation of Securities Commissions. Only transactions in permitted derivative instruments involving INR or interest rates on INR between residents and non-residents permitted by the RBI can be entered into on the offshore ETP. The offshore ETP is required to provide the RBI with details of transactions entered into by residents and other prescribed transaction-related information.

The draft directions also contemplate the imposition of qualitative criteria on ETP operators. These include access and participation standards, such as the requirement to conduct due diligence at the time of onboarding; risk management criteria such as controlling access and preventing unauthorised access; ensuring trades are dealt with in a ¡°fair, non-discretionary and orderly manner¡±, and segregating the ETP from other financial services. An ETP operator is also required to have in place controls to reduce erroneous transactions.

This development is an interesting advance but does not appear to consider the growing participation of Indian residents in offshore platforms that offer crypto trading opportunities. By prescribing that an ETP can only offer contracts that are either permitted by the RBI or, in the case of offshore ETPs contracts that are regulated by financial services regulators in the jurisdiction of incorporation, the draft directions seem to avoid giving explicit guidance on the RBI¡¯s view of the permissibility of contracts in crypto.

This may be deliberate, with the RBI waiting and watching the development of this segment, particularly in view of the introduction of the RBI¡¯s central bank digital currency. This may show appropriate prudence on the part of the regulator. It may, however, impact the benefits of fast-changing fintech.

Sawant Singh and Aditya Bhargava are partners at Phoenix Legal.