AMFI introduces new market manipulation standards for Indian asset management companies

The Association of Mutual Funds in India (AMFI) is rolling out new standards for institutional mechanisms to detect and deter market manipulation, including front-running and fraudulent transactions within asset management companies (AMCs).

These measures are part of a broader initiative to align with the Securities and Exchange Board of India (SEBI) regulations, which will bring mutual funds under the SEBI (Prohibition of Insider Trading) Regulations, 2015, from November 2024.

Phased implementation timeline

The rollout will occur in four stages, starting with equity mutual funds:

• November 2, 2024: The first phase covers equity securities trades in mutual fund schemes (excluding international equities) with assets over Rs 10,000 crore.
• February 2, 2025: The standards expand to equity schemes with assets under Rs 10,000 crore.
• May 2, 2025: Trades involving passive schemes, arbitrage schemes, and overseas securities will be required to comply across all schemes.
• August 2, 2025: The final phase encompasses debt securities, commodities, real estate investment trusts (REITs), and infrastructure investment trusts (InvITs).

Key measures and requirements

Oversight:

CEOs, compliance officers, managing directors, and similar business leaders are required to establish robust regulatory mechanisms to comply with the new standards. These systems must generate, process, and review alerts related to potential market abuse, with alerts being produced weekly and reported to both the board of directors and the trustees.

Brokers:

AMCs must take prompt action against brokers flagged by alerts for suspicious activities, including the potential termination of agreements. Quarterly reports detailing these actions must be submitted to SEBI and trustees. Additionally, AMCs are required to incorporate clauses in their broker agreements that allow for appropriate measures to be taken against brokers suspected of market abuse.

Employees:

Personal transactions of key employees and their immediate relatives must be reviewed if linked to any suspicious activity. Additionally, fund managers and dealers are required to take a mandatory leave of at least 10 business days within a financial year, with at least five of those days being consecutive.

Resources:

Mutual fund houses are encouraged to collaborate by sharing their surveillance systems, internal controls, and escalation processes. This approach helps to reduce costs while enhancing compliance efficiency across the industry.

Increasing focus on market abuse in India

Global regulators have increasingly focused on curbing market abuse, and India is following suit with the introduction of new standards. SEBI has mandated that all brokers implement market abuse mechanisms by January 1, 2025, and brought in new legislation for stockbroking firms in India, the last update to which was 1992. These measures are designed to prevent insider manipulation, ensuring a fairer playing field in the mutual fund industry.

By extending insider trading norms and enforcing strict compliance, SEBI and AMFI aim to protect investor interests and uphold market integrity. This initiative marks a significant step toward enhancing transparency and trust in India’s financial markets.

The use of technology to detect and manage market abuse

Introducing advanced regulatory technology such as eflow’s TZTS Trade Surveillance system can significantly streamline a firm’s compliance reporting processes. By automating the detection of potential instances of market abuse, firms can generate, process, and review alerts more efficiently, to ensure that they meet all the requirements set out by the new standards.

TZTS equips firms with specialised tests to detect manipulative behaviours, particularly relevant to SEBI and AMFI’s new regulations on insider trading, front-running, and misuse of insider information as well as over 35 other forms of manipulative behaviours such as marking the open/close, pre-arranged trading, wash trading and more. Preset and customisable reports can also be used to generate management information quickly and efficiently. The system offers targeted functionality, ensuring seamless compliance and proactive market abuse monitoring.

To explore how this technology can benefit your firm, book a consultation with our experts today.