Sebi Proposes Overhaul Of STP Framework To Reduce Costs And Enhance Security

The Securities and Exchange Board of India (Sebi) has proposed a significant architectural shift related to the Straight Through Processing (STP) framework. The regulator plans to do away with the existing centralised hub for processing institutional trades. The capital market regulator has proposed replacing it with a decentralised, direct Application Programming Interface (API)-based connectivity network.

The proposal to change the mechanism was made in a consultation paper issued on May 19. By undertaking an overhaul of the processing system, the regulator seeks to enhance the framework to ease cost burdens, reduce latency in transactions and improve service throughout the financial ecosystem.

What Is Straight Through Processing (STP)

Straight-through processing (STP) is an automated mechanism that handles financial transactions on the backend of the financial ecosystem. The mechanism controls all transactions from order origination to settlement and enables the rapid, electronic exchange of vital transaction data, such as Electronic Contract Notes (ECNs), between market intermediaries like stockbrokers and institutional investors.

Sebi’s New Proposal

Sebi seeks to discontinue the use of a centralised STP Hub and create a system where Service Providers (SSPs) will be able to communicate directly through standardised, secure Application Programming Interfaces (APIs).

The regulator expects that the proposed decentralisation will reduce the number of steps needed to validate post-trade data.The regulator has also proposed an optional API-based framework for market participants utilising the same service provider. This system will replace traditional, error-prone manual file uploads and downloads with automated and secure system-to-system communications.

How Does This Impact Investors and Market Participants?

Large market participants like custodians, fund houses, and stockbrokers will be impacted by the new structure. The new structure eliminates the current framework, which is a single point of technical failure. According to Sebi’s analysis, which was mentioned in the proposal, 95 per cent to 99 per cent of STP traffic is routed through a single provider, posing severe concentration risks in case of a glitch.

The proposed framework removes this risk and is also expected to lower structural transmission fees.

Sebi has also clarified that this technological upgrade requires zero system changes or modifications at the end-user level. Thus, retail investors are not likely to face any compliance-related disruption on trading apps. However, they will passively benefit from a more resilient market infrastructure, reduced operational errors and faster backend execution.