International Financial Services Centres Authority (“IFSCA” or “Authority”), in exercise of powers conferred under Section 12 of the International Financial Services Centres Authority Act, 2019, vide Notification No. IFSCA-DMCDPRMS/2/2023/DMC[1] dated February 04, 2025, permitted the introduction of one or more Liquid Enhancement Schemes (“LES”) by the Bullion Exchange in the International Financial Services Centre (“Circular”). The key features of the Circular include:
I. Approval and Monitoring:
- The LES shall be approved by the Bullion Exchange’s Governing Board, which shall be valid for 1 (one) year, or lesser period, as may be decided by the Governing Board. The Board shall monitor the implementation and outcomes of the same, quarterly.
- The LES must be objective, transparent, non-discretionary, and non-discriminatory, specifying incentives available to the market makers or the liquidity providers, such as fee discounts, cash payments, or share issuance.
- The LES shall maintain market integrity and not compromise risk management.
- The effectiveness of the LES shall be reviewed quarterly by the Governing Board and the reports of the same shall be submitted to IFSCA every 6 (six) months.
- Any changes or discontinuation of the LES must be disclosed at least 15 (fifteen) days in advance. Further it shall be ensured that the reports on incentives and volumes shall be posted on the Exchange’s website, on a monthly basis.
II. Eligibility of Securities under LES:
- The Bullion Exchange shall establish benchmarks to select securities eligible for the LES, focusing on the enhancement of liquidity in illiquid securities.
- If the LES has been discontinued, the same can be reintroduced on the same security at a later time. A list of eligible securities shall be published for the market.
III. Types of Incentives under LES:
Incentives under LES must be transparent and measurable, and may take either of the following 2 (two) forms:
- Fee Discounts/ Payments: Incentives may be provided in the form of fee adjustments, discounts, or cash payments. However, these incentives must not exceed 25% (twenty five percent) of the net profits or free reserves of the Bullion Exchange, whichever is higher, from the preceding financial year. During the first 5 (five) years of operation, the Bullion Exchange may earmark up to 25% (twenty five percent) of its audited net worth (as on the last day of the previous financial year), as yearly LES incentives. A separate reserve fund shall be created for LES incentives and expenses, with funds transferred into this reserve fund, upon approval from the Governing Board. This reserve shall not be counted towards the Exchange’s net worth calculation.
- Shares, Options, and Warrants: The Bullion Exchange may issue shares, options, or warrants as incentives under LES, with the total amount not exceeding 25% (twenty five percent) of the issued and outstanding shares of the Bullion Exchange, as on the last day of the preceding financial year. Further, it shall be the responsibility of the Bullion Exchange to ensure compliance with IFSCA (Bullion Market) Regulations, 2025, at all times.
IV. Market Integrity Measures:
- The Bullion Exchange shall be required to ensure that no trades are conducted solely for the purpose of obtaining incentives. No incentives will be granted in cases of self-dealing, i.e., when the same Unique Client Code (UCC) is used on both sides of a trade.
- The Bullion Exchange must implement a mechanism to ensure that the LES does not manipulate or mis-sell products in the market.
V. Market Maker/ Liquidity Enhancer:
- Identification of Orders: All market maker/ liquidity enhancer orders/ trades shall be identifiable by the Bullion Exchange.
- Conflict of Interest: A conflict-of-interest framework shall be established, ensuring that market makers disclose any potential conflicts when participating in the LES. Such disclosures shall be made publicly available on the Exchange’s website.
VI. Action Steps for the Bullion Exchange:
- The Bullion Exchange shall take the necessary steps to implement systems necessary for the execution of the LES, including necessary amendments to the relevant byelaws, rules, and regulations.
- The provisions of this Circular must be communicated to the members and published on the Exchange’s website.
- The Bullion Exchange must report the status of the LES implementation to IFSCA.
[1] https://ifsca.gov.in/Viewer?Path=Document%2FLegal%2Fcircular-for-les-in-bullion-exchange04022025094237.pdf&Title=Liquidity%20Enhancement%20Scheme%20for%20Bullion%20Exchange&Date=04%2F02%2F2025