STOCK EXCHANGE FUNCTIONING & BACK OFFICE MANAGEMENT

1

WHAT IS A STOCK EXCHANGE?

• Stock Exchange (also called Stock Market or Share Market) is one important constituent of capital market.

• Stock Exchange is an organized market for the purchase and sale of industrial and financial security. It is convenient place where trading in securities is conducted in systematic manner i.e. as per certain rules and regulations.

• It performs various functions and offers useful services to investors and borrowing companies. It is an investment intermediary and facilitates economic and industrial development of a country.

2

THE FIRST STOCK EXCHANGE

The first stock exchange was in the Netherlands when the Dutch East India Company issued the first shares on the Amsterdam Stock Exchange. Slowly, stock exchanges opened in London and in New York.

Amsterdam Stock Exchange is the oldest stock exchange in the world. While BSE is the oldest in India

3

INDIAN SECURITIES MARKET• A stock market or equity market is a public market for the

trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange

• Stock exchange allows businesses to be publicly traded, or raise additional financial capital for expansion by selling shares of ownership of the company in a public market

• It mobilizes the savings from the household sector to the investment in the corporate sector

• Stock market is known as the barometer of the economy

4

TILL RECENT PAST

• Floor trading took place in all stock exchanges • Open out cry system during official trading hours

• Trading post were assigned for different securities to buy and sell; system needed a face to face contact, which reduced trading volume

• Deals were not so transparent, favoured brokers than investors

• Setting of NSE resulted in screen based trading

5

TYPES OF MARKET

1. Normal Market :Order Traded in regular lot Size For demat shares, lot size is 1 share

2. Odd Lot Market : Used for limited physical Market Order not traded in regular lot Size but both price & quantity should tally with each other.

6

3. Spot Market : Different settlement periods depends on normal

orders Sell & Purchases takes place on same date.

4. Auction Market : Initiated by exchange on behalf of members for settlement related reasons 3 participants

7

BIG STOCK MARKETS NYSE ( New York Stock Exchange) NASDAQ-America Dow Jones S&P‘ 500 Tokyo Stock Exchange London Stock Exchange Bombay Stock Exchange, India National Stock Exchange, India

8

STOCK EXCHANGES IN INDIA

There are 22 stock exchanges in India. But, two of them are biggest.

NSE (National stock exchange) - is the 9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading.

BSE (Bombay stock exchange) - is the oldest stock exchange in Asia with a rich heritage of over 137 years of existence.

9

10

BOMBAY STOCK EXCHANGE• Location: Mumbai• Index: Sensex (SENSitve indEX)• Consist of group of 30 Stock• Members: 852• Date of Launch: 03 January 1986• Base period:1978-79• Base Index Value:100• Sectoral indices • Timing: 09.15 AM – 03.30 PM• Listed Co. : over 6000

11

NATIONAL STOCK EXCHANGE

• Location: Mumbai• Index: Nifty (National Stock Exchange Fifty)

• Consist of group of 50 Stocks• Date of Launch: April 1994• Base period: 1993-94• Base index value: 1000• Members 726

12

IMPORTANT TERMS IN STOCK MARKET AND IN STOCK TRADING

Open - The stock price in beginning of Day (i.e. in morning).

High - The stock price reached at the highest level in a day.

Low - The stock price reached the lowest level in a day.

13

IMPORTANT TERMS IN STOCK MARKET AND IN STOCK TRADING

Close - The stock price at which it remains after the end of market timings or the final price of the stock when the market closes for a day. Volume - Volume is nothing but quantity.

Bid - The Buying price is called as Bid price.

Offer - The selling price is called offer price.

14

INVESTMENT IN SHORT TERM, MID TERM AND LONG TERM TRADINGShort Term Trading -

Stock trading done from one week to couple of months is called short term.

Mid term Trading - Stock trading done from one month to couple of months, say six to eight months is called mid term trading.

15

INVESTMENT IN SHORT TERM, MID TERM AND LONG TERM TRADING

Long term trading - Stock trading done from couple of months to couple of years is called long term trading.Companies whose fundamentals are good and have good future plans then the stocks of these companies are used for long term trading.Generally traders having good capital go for long term trading.

16

STOCK MARKET CONDITIONSThere are two ways to describe the general conditions of the stock market:

1)BULL MARKET2)BEAR MARKET

Bull Market: A Bull Market indicates the constant upward movement of

the stock market. A particular stock that seems to be increasing in value is described to be bullish.

17

STOCK MARKET CONDITIONSBEAR MARKET:

A bear market indicates the continuous downward movement of the stock market. Stock that seems to be decreasing in value is described to be bearish.

18

1. Demand and supply2. Bank rate3. Speculative pressure4. Actions of underwriters and other financial institutions

CAUSES OF PRICE FLUCTUATION

19

5. Financial position of the company6. Trade cycle7. Political factors8. Sympathetic fluctuations9. Other factors:

A. Weather conditions – A sudden turn in weather conditions. Eg: excess rainfall

B. Oil prices in the international market

20

HOW SENSEX INDEX IS CALCULATED

The formula for calculating the Sensex =(sum of Free Float Market capitalization of 30 benchmark stocks)*

Index Factor

Where; Index Factor = 100/market cap value in 1978-79.

21

EXAMPLE ON SENSEX INDEX CALCULATION

Assume Sensex has only 2 stocks namely SBI and RELIANCE. Total shares in SBI are 500 out of 200 are held by government and only 300 are available for public trading. Reliance has 1000 shares out of which 500 are held by promoters and 500 are available for trading. Assume price of SBI stock is Rs. 100 & Reliance is RS. 200.

22

EXAMPLE ON SENSEX CALCULATION

Solution –Then Free Float Cap of these two company = (300*100+500*200)= 30,000+1,00,000= 1,30,000Assume market cap during the year 1978-79 was 25000Then SENSEX = 1,30,000*100/25000 = 520

23

HOW NIFTY INDEX IS CALCULATED

The National Stock Exchange (NSE) is associated with Nifty

The calculation of Nifty is same as we calculated SENSEX. But with two key differences.

1. Base year is 1995 and base value is 10002. Nifty is calculation based on 50 stocks. (everything else remaining the same in nifty index

calculation as well.)

24

PRODUCTS AND PARTICIPANTS

Products

Equities Debt securities Derivatives Mutual

Funds

25

PRODUCTS AND PARTICIPANTSParticipants

Participants

Investors Issuers Intermediaries

26

FUNCTIONS OF STOCK EXCHANGE

Raising Capital for Business

Mobilizing Savings for Investment

27

FUNCTIONS OF STOCK EXCHANGE

Facilitate Company Growth & Corporate Governance

Provides Safety and Security in Dealings

28

FUNCTIONS OF STOCK EXCHANGE

Pricing of Securities

Creates Investment Opportunities for Small Investors

29

FUNCTIONS OF STOCK EXCHANGE

Liquidity

Barometer of the Economy

30

TRANSACTION CYCLE

31

DAILY FUNCTIONING OF EQUITY MARKET

32

BLOCK DEAL• A single trade having quantity greater than or equal to 500,000 or value

greater than or equal ₹ 5 crores, executed through Block deal window

• Block Deal Orders are executed only during the first 35 minutes of the continuous trading session i.e. from 9:15 am to 9:50 am

• Block Deal is allowed only in Cash segment

• Block deal order for scrip should be within range of (+/-) 1% from the last traded price or the previous closing price

• For block deal order to get traded, the quantity and rate should be exactly

the same as opposite-side block deal order

33

MARKET CLOSE & POST CLOSE

Mar

ket close

• Time frame when no trading takes place

• Trading members are informed

• Inquiries & Trade cancellations permitted

Post cl

ose

•Post close is a 20 minute window from 3:40 pm – 4:00 pm•Market price orders•Securities traded in normal market are permitted

34

KEY TERMS RELATING TO ‘STOCK MARKET’

35

CAPITAL STRUCTURE• Capital structure means the proportion of debt and equity used

for financing the operations of a business or an enterprises.The capital structure should be such which increases the value of equity shares or maximises the wealth of share holder.

36

• In finance, to corner the market is to get sufficient control of a particular stock, commodity, or other asset to allow the price to be manipulated. Corner the market to have the greatest market share in a particular industry without having a monopoly. They may charge higher prices for their products without fear of losing too much business.

CORNERING

37

SPECULATION

• Speculation is the practice of engaging in risky financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a tradable good.

• Speculation can in principle involve any tradable good or financial instrument.

38

Speculators:• Many speculators pay little attention to the fundamental

value of a security and instead focus purely on price movements.

Four kinds of speculators operate in the Indian Stock Exchange. They are known as :

Bull Bear Stag and Lame duck.

39

Bull:A Bull is an operator who is hopeful of price rise in the near future. In anticipation of price rise he makes purchases of shares and other securities with the intention of selling them at higher prices in future. He being a speculator has no intention of taking delivery of securities but deals only in difference of prices.

40

Bear:A bear does not have securities at present but sells them at higher prices in anticipation that he will supply them business purchasing at lower prices in the future.

41

Stag:A stag is that type of speculator who treads his path very carefully. He applies for shares in new companies and expects to sell them at a premium if he gets an allotment. He selects those companies whose shares are most in demand and are likely to carry a premium. He sells the shares before being called to pay the allotment money.

42

Lame Duck:

A Lame Duck is nothing but a stressed bear. When a bear finds it difficult to complete his promise he is labeled as a lame duck.

43

PREREQUISITES FOR TRADING

• We need to have DP(DEPOSITORY PARTICIPANT) account.

• We need to have a Trading account.

• And of course money

44

How Trading Happens?

Stock ExchangeEx : NSE,BSE

People using terminal provided by their brokers

45

KINDS OF TRADING• Intra-day Trading:

• Buying and Selling on the same day• Brokerage will be different for intra-day and delivery based trading,

intra-day being lesser

• Delivery based Trading:

• Buying and Selling are on different days• Brokerage will be higher than intra-day• Their will be minimum delivery charges

46

HOW DOES IT HAPPEN• Ex : You buy the share on Monday. It will be delivered to you on Wednesday’s settlement period (T + 2) normally.

47

WHAT IS SHORT SELLING?• Selling something which you don’t have. Ex: Lets consider a company RIL. Its priced at Rs 2,500/- before opening. You know it’s going to

fall that day because of some reason. But you don’t have any shares with you of RIL. But still you can sell the shares, this is called as short selling.

48

SHORT COVERING

• The buying in of stocks or other securities or commodities that have been sold short, typically to avoid loss when prices move upwards.

Assume you sold 10 RIL shares in morning at Rs 2,500/-. By evening as you had thought, it had fallen down to Rs 2,400/-. Now you buy back those 10 shares what you had sold. So the difference in amount, 2,500 – 2,400 = 100

100 * 10 = 1000, is yours. This process of buying back is called short covering.

50

WHAT IF YOU DON’T SHORT COVER?• You will become a defaulter.

• Lets understand this with an Example.• Assume you short sold on Monday, as you haven’t short covered

it, you need to deliver it on Wednesday(T + 2). But you don’t have the shares to deliver. So NSE or BSE will buy the shares on behalf of you in auction market, and deliver it to the buyer in (T + 3 days). In auction market max price is 10% higher than in normal market.

51

EXAMPLE QUESTION

Assume Ram bought on Monday 100 shares ofRIL at Rs 2,500/- , on response to some goodnews it rose high on Tuesday to say Rs 2,600/-.

So Ram is in a whooping profit of (100 * 100)Rs 10,000/- in a day.

Ram plans to sell it.Will he get that profit for sure?

52

EXAMPLE OF SHORT SELLING

Monday : Ram bought stocks

Tuesday : Ram sold stocks

Wednesday : Stocks wont get delivered to him, as they were short sold.

Thursday : Ram needs to deliver the stocks, as he has sold on Tuesday, but he don’t have them now, as they were short sold, so he becomes a defaulter.

Friday : Ram gets the delivery of short sold stocks

53

DAY PRICE

Monday 2500

Tuesday 2600

Wednesday 2620

Thursday 2670

Friday 2550

54

Ram actually ended up in loss!!!

55

TRADING MEMBERS & CLEARING MEMBERS • According to SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, a stockbroker is

member of a stock exchange and is required to hold a certificate of registration from SEBI in order to buy, sell or deal in securities

• Transactions in any stock exchange are executed by member brokers who deal with investor

• An investor can buy or sell securities only through one of the members of the exchange

• Trading Membership entitles the members only to trade on his own account as well as on account of his clients. These Members do not have any right to clear or settle such trades

• Trading-cum-Clearing Membership entitles the members to trade and clear, both for themselves and/ or on behalf of their clients

56

BROKERWho can become a broker in India?

• An individual, a firm or a corporate can become a trading member(broker) of a stock exchange

• Minimum age shall be 21 for individuals and partners/directors of firms/corporates

• Individual/Partners/Directors must be at least graduates

• Should have a minimum of 2 years experience in an activity related to dealing in securities or as portfolio manager or as investment consultant or as a merchant banker or in financial services or treasury, broker, sub broker, dealer, authorized agent or authorized clerk or authorized representative of a recognized stock exchange

57

AUTHORIZED PERSONS & SUB-BROKERS• An authorized person introduces clients to the trading member and receives

remuneration/ commission/ compensation from the trading member and not from the clients

• The clients introduced by the authorized person are required to deliver securities and make payments directly in the trade name of the trading member (as appearing on the SEBI registration certificate)

• Similarly, the trading member should deliver securities and make payments directly in the name of the clients

• A sub-broker is allowed to be associated with only one Trading Member of the Exchange; Provide assistance to the stock broker

58

BROKERAGE

A commission charged by a broker to his investors

• Let's say you bought & sold shares worth Rs 20,000• Brokerage @ 0.30% on Rs 20,000 = Rs 60• Transaction charges @ 0.0035% on Rs. 20,000 = Rs 0.7• Turnover Chages @ 0.0001% on Rs. 20,000= Rs 0.02• Service tax @ 10.2% on Rs 60 = Rs 6.12• Stamp Duty @ 0.01% on Rs. 20,000=Rs. 2• STT @ 0.1% on Rs 20,000 = Rs 20• Total payments made by you on Rs 20,000 = Rs 88.84

59

BROKER-CLIENTS RELATIONS

Client Registration Documents

Unique Client Code (UCC)

Margins from the Clients

Execution of Orders

60

TRADING MEMBER’S RESPONSIBILITIES FOR TRADES

Contract note

Delivery of the securities

Maximum brokerage chargeable

Maintain separate bank accounts

61

CONTRACT NOTE

62

UNIFORM DOCUMENTATION FOR OPENING TRADING ACCOUNT

• SEBI has devised uniform documentation to be followed by all the stock brokers/ trading members for opening trading account for clients

1: Account Opening Kit – Index of Documents

2: KYC Application Form – For Individuals and Non-Individuals

3: Trading Account Related Details

4: Rights and Obligations of Stock-brokers, Sub-brokers & Clients

5: Risk Disclosure Document for Capital Market and Derivatives Segments

6: Guidance Note - Do’s and Don’ts for Trading on the Exchange(s) for Investors

63

DEPARTMENTS IN BACK OFFICE

1 •Client Registration Department (CRD)

2 •Delivery and Accounts Department

3 •Compliance Department

4 •Surveillance Department

6 •SB Department (sub broker)

7 •Department of Investors Services

64

SCREEN BASED TRADING

• Modern, fully computerised trading system

PUNCH THE ORDER MATCH THE ORDER TRANSACTION COMPLETED

65

SCREEN BASED TRADING• Under this system a trading member can punch into the computer, the number

of securities and the prices at which he would like to transact. The transaction is executed as soon as the system is able to find a matching sell or buy order from a counter party.

• An active order tries to find a match on the other side of the books. If it finds a match, a trade is generated. If it does not find a match, the order becomes a passive order and goes and sits in the order book, as per the price/time priority

• Price priority means that if two orders are entered into the system, the order having the best price gets the higher priority.

• Time priority means if two orders having the same price is entered, the order that is entered first gets the higher priority.

66

ADVANTAGES OF SBTS• Improves operational efficiency

• Increased the informational efficiency of markets

• Executes trades instantly

• Helps traders to simultaneously analyze options and execute orders

• Manage portfolios efficiently

67

MARGIN TRADING

• Margin trading is a facility for investors to trade in securities with borrowed funds provided by the broker or other financers

• The margin needs to be maintained at all times. If the market falls, then the broker will call for additional funds from the investor. This is called a ‘margin call’.

• Corporate brokers with net worth of at least ₹ 3 crore are eligible for providing Margin trading facility to their clients subject to their entering into an agreement.

• The broker can provide the margin funds through own resources or borrowing from banks or NBFCs regulated by SEBI. Borrowing from other sources is not permitted

68

CLEARING AND SETTLEMENT

69

AGENCIES INVOLVED IN CLEARING AND SETTLEMENT PROCESS

• Clearing Corporation

• Clearing Member

• Custodian

• Clearing Bank

• Depositories

70

NSCCL (NATIONAL SECURITIES CLEARING CORPORATION LIMITED)

• It clears all trades• Determines obligations of members• Arranges for pay-in of funds/securities• Receives funds/securities• Processes for shortages in funds/securities• Arranges for pay-out of funds/securities to members • Guarantees settlement• Collects and maintains margins/collateral/base capital/other funds.

71

NSCCL (NATIONAL SECURITIES CLEARING CORPORATION LIMITED)

NSCCL was set up with the following objectives:

1. To bring and sustain confidence in clearing and settlement of

securities

2. To promote and maintain, short and consistent settlement cycles

3. To provide counter-party risk guarantee

4. To operate a tight risk containment system

72

CLEARING MEMBER

• A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement of all deals executed by Trading Members (TM) on NSE, who clear and settle such deals through them.

• Functions:1. Clearing

2. Settlement

3. Risk Management

73

TYPES OF CLEARING MEMBERS• Trading Member Clearing Member (TM-CM)

A Clearing Member who is also a TM. Such CMs may clear and settle their own proprietary trades, their clients' trades as well as trades of other TM's & Custodial Participants

• Professional Clearing Member (PCM)A CM who is not a TM. Typically banks or custodians could become a PCM and clear and settle for TM's as well as of the Custodial Participants

• Self Clearing Member (SCM)A Clearing Member who is also a TM. Such CMs may clear and settle only their own proprietary trades and their clients' trades but cannot clear and settle trades of other TM's.

74

CUSTODIAN• A custodian is a person who holds for safekeeping the documentary evidence of the title

to property belonging like share certificates, etc.

• The title to the custodian’s property remains vested with the original holder, or in their nominee(s), or custodian trustee.

• In NSCCL, custodian is a clearing member but not a trading member.

• He settles trades assigned to him by trading members.

• The custodian is required to confirm whether it is going to settle a particular trade or not.

• If it is confirmed, the NSCCL assigns that obligation to that custodian and the custodian is required to settle it on the settlement day.

• If the custodian rejects the trade, the obligation is assigned back to the trading/clearing member.

75

CUSTODIANS REGISTERED WITH SEBI

• Axis Bank Ltd• ILRTL• BNP Paribas

• J P Morgan Chase• Citibank• HSBC Ltd• DBS Bank Ltd• ICICI Ltd• Deutsche Bank A.G.• ILFS Ltd• Edelweiss Custodial Services Limited

• SHRTL• Kotak Mahindra Bank• HDFC Bank Ltd• Orbis Financial Corporation Ltd• Standard Chartered Bank• State Bank of India• Stock Holding Corporation of India

Ltd.• SBI Custodial Services Pvt. Ltd

76

CLEARING BANK• A key link between the clearing members and NSCCL for funds settlement.

• Every clearing member is required to open a dedicated settlement account

with one of the clearing banks.

• Based on his obligation as determined through clearing, the clearing member

makes funds available in the clearing account for the pay-in and receives funds

in case of a pay-out.

77

CLEARING BANKS• Canara Bank

• Union Bank of India

• HDFC Bank

• State Bank of India

• HSBC Bank

• IndusInd Bank

• Axis Bank

• ICICI Bank

• Citi Bank

• IDBI Bank

• Kotak Mahindra Bank

•• Bank of India

• Standard Chartered Bank

78

DEPOSITORIES

• A depository holds the securities in a dematerialized form for the investors in their beneficiary accounts.

• Each clearing member is required to maintain a clearing pool account with the depositories. They are required to make available the required securities in the designated account on settlement day.

• The depository runs an electronic file to transfer the securities from the accounts of the custodians to that of the NSCCL (and vice versa) as per the schedule of allocation of the securities.

• The two depositories in India are the National Securities Depository Ltd. (NSDL) and the Central Depository Services (India) Ltd. (CDSL).

79

SETTLEMENT• Settlement takes place once clearing process is performed

• The settlement agency receives cash from buyers and securities from sellers and, at the end of the process, gives the securities to the buyer and the cash to the seller.

80

SETTLEMENT PERIOD• The period of time between the settlement date and the transaction date

that is allotted to the parties of a transaction to satisfy the transaction's obligations.

• The buyer must make payment within the settlement period, while the seller must deliver the purchased security within this period.

• Depending on the type of security traded, the exact length of the settlement period will differ.

81

• The settlement period is often quoted as T+1, T+2 or T+3.

• For stocks, the settlement period is three days (T+3) after the transaction.

• For certificates of deposit and commercial paper it is (T+1), while for forex transactions it is (T+2)

82

TRANSACTION CYCLE

Decision to Trade

Placing Order

Trade Execution

Clearing of Trades

Settlement of Trade

Funds/ Securities

83

SETTLEMENT PROCESS• National Securities Clearing Corporation Ltd. (NSCCL) determines the

funds/securities obligations of the trading members and ensures that the trading members meet their objectives

• Core Functions involved in this process Trade RecordingTrade ConfirmationDetermination of obligationPay in of Funds/SecuritiesPay out of Funds/SecuritiesRisk Management

84

SETTLEMENT PROCESS

• Two critical activities in the settlement process are:

– Pay-in of Funds and Securities

– Pay-out of Funds and Securities

85

STEPS FOLLOWED IN SETTLEMENT OF TRADE

Step 1: Determination of obligations

Step 2: Pay-in of funds and securities

Step 3: Pay-out of funds and securities

Step 4: Risk management

86

SETTLEMENT CYCLE

DAY TIMINGS JOB PERFORMED

T(TRADE DAY) 9.55 A.M TO 3.30 P.M BUY/SELL SECURITIES

T+1 BY 11.00 A.M CONFIRMATION OF ALL TRADES

BY 1.30 P.M PROCESSING AND DOWNLOADING OF

FILES BY BROKERS/CUSTODIA

NS

T+2 BY 11.00 A.M PAY IN OF SECURITIES/FUNDS

BY 1.30 P.M PAY-OUT OF SECURITIES/FUNDS

87

SETTLEMNT PROCESS OF NSE1.Trade Details from Exchange to NSCCL

2.NSCCL notifies the consummated trade details to CMs/custodians who affirm back. Based on the affirmation, NSCCL applies multilateral netting and determines obligations 3.Download of obligation and pay-in advice of funds/securities

4.Instructions to clearing banks to make funds available by pay-in time

88

5.Instructions to depositories to make securities available by pay-in-time

6.Pay-in of securities

7. Pay-in of funds

8. Pay-out of securities

9. Pay-out of funds

10. Depository informs custodians/CMs through DPs Clearing Banks inform custodians/CMs

89

AUCTION SETTLEMENT• On the settlement day NSCCL accepts pay-in of securities made

by members through depositories and identifies the shortages

• The members are debited by an amount equivalent to the securities not delivered and valued at a valuation price. This is known as valuation debit

• For all such short deliveries NSCCL conducts a buying-in auction on the T+2 day, after completion of the pay-out, through the NSE trading system

• If the buy-in auction price is more than the valuation price, the CM is required to make good the difference. All shortages not bought-in are deemed closed out.

90

AUCTION SETTLEMENTDAY JOB PERFORMED

T(TRADE DAY) TRADE DAYT+1 PAY-IN/PAY-OUT OF SECURITIES

AND FUNDST+2 AUCTION SESSIONT+3 PAY-IN/PAY-OUT AND CLOSE OUT

SESSIONT+4 BAD DELIVERY REPORT

T+5 CLOSE OUT POSITION

91

RISKS IN SETTLEMENT

• Settlement Risk

• Liquidity Risk

• Operational Risk

• Systemic Risk

• Replacement Risk

• Principal Risk

• Legal Risk

• Market Risk

92

INTERNET BASED TRADING• Broker is eligible for providing IBT (Internet Based Trading) facilities.

• Provided through wireless technologies through various devices using Internet Protocol.

• Broker to comply with requirements laid by SEBI/ Exchanges updated regularly.

• Availability of the service posted on brokers website.

• Educating client about the use of the facility

93

INTERNET BASED TRADING• Initial Password generated by IBT.

• Policy in line with norms prescribed SEBI/Exchange.

• Client responsible for the security of the Username & Password.

• Misplacement of Password or Unauthorised access to account shall be bought to the notice of Stock broker in writing.

• Client responsible for any misuse.

94

CIRCUIT BREAKERS

95

CIRCUIT BREAKERS• For Equity Shares, daily price bands of 2%, 5%, 10% & 20% are

applicable

• No price bands are applicable on scrips on which derivatives products are available

• Price band of 20% on all remaining scrips (including debentures & preference shares)

96

DEMATERIALISATION OF SHARES Introduced in India through the enactment of the Depositories Act,

1996. It is not mandatory One may keep its holding partly in physical form and partly in DEMAT

form. Although, investors have an alternative to hold securities and settle

trades in physical forms, they need a DEMAT account as, in practice almost all trades on stock exchanges are now being settled in DEMAT form only.

Need for Dematerialization

97

DEMATERIALISATION PROCESS1. The client (registered owner) will submit a request to the DP in

the Dematerialisation Process

2. The DP will verify that the form is duly filled in and all details are given in the form

3. The DP will scrutinize the form and the certificates

4. In case the securities are in order, the details of the request as mentioned in the form are entered in the DPM (software provided by NSDL to the DP) and a Dematerialisation Request Number (DRN) will be generated by the system.

98

DEMATERIALISATION PROCESS

5. The request is then released & forwarded electronically to DM (DM - Depository Module, NSDL's software system) by DPM.

6. The DM forwards the request to the Issuer/ R&T agent electronically.

7. The DP will punch the certificates on the company name so that it does not destroy any material information on the certificate.

8. The DP will then despatch the certificates along with the request form and a covering letter to the Issuer/ R&T agent.

99

DEMATERIALISATION PROCESS

9. The Issuer/ R&T agent confirms acceptance of the request for dematerialisation in his system DPM (SHR) and the same will be forwarded to the DM, if the request is found in order.

10.The DM will electronically authorise the creation of appropriate credit balances in the client's account.

11.The DPM will credit the client's account automatically.

12.The DP must inform the client of the changes in the client's account following the confirmation of the request.

100

REMATERIALISATION OF SHARES

• Rematerialisation is the process by which a client can get his electronic holdings converted into physical certificates

• Rematerialisation Process1. The client has to submit the rematerialisation request to the DP with whom he

has an account2. The DP enters the request in its system which blocks the client's holdings to that

extent automatically 3. The DP releases the request to NSDL and sends the request form to the Issuer/

R&T agent4. The Issuer/ R&T agent then prints the certificates, despatches the same to the

client and simultaneously electronically confirms the acceptance of the request to NSDL

5. Thereafter, the client's blocked balances are debited

101

TERMINATION OF RELATIONSHIP

• Relationship between the stock broker and the client shall be terminated, if

the stock broker ceases to be a member of the stock exchange.

• Broker, sub-broker and client can terminate the relationship after giving

notice of 1 month in writing.

• All transaction prior to termination shall continue to be vested in interest of

respective parties.

• Inability of the sub broker to continue transactions to be intimated to the

client.

• ‘Rights & Obligations’ document to remain in force unless client withdraws

the same.

102

WHO CAN BE MEMBER OF EXCHANGE?

• No entry / exit barrier to member of NSE

• Person Eligible are:

• Individuals (Sole Proprietor)

• Partnership Firms registered under the Indian

Partnership Act, 1932

• Bank for Currency Derivative segment

• Corporations, Companies or Institutions

103

104

SUSPENSION OF MEMBERSHIPMISCONDUCT

Fraud & Violation

• Breach Rules, Bye Laws & Regulations

Failure to submit audited accounts

Failure to pay dues and fees

• Failure to give information to the exchange

105

UN-BUSINESSLIKE CONDUCT

Market manipulation and Rigging

• Dishonoured cheque

Transaction in fictitious name

• Circulation of rumours

106

UN-PROFESSIONAL CONDUCT

Dealing in securities which is not permitted

Evasion of brokerage charges

• Dealing with the entities prohibited by SEBI

107

ARBITRAGE OPPORTUNITY IN STOCK MARKET• Arbitrage is the practice of taking advantage of a price difference

between two or more markets or exchanges.

• In Indian markets stocks are traded in two major exchanges – NSE (National Stock Exchange) and BSE (Bombay Stock Exchange)

• It means you can take advantage of buying the stock in one exchange and selling it in other and bag the difference as profit.

108

POINTS TO CONSIDER BEFORE DOING ARBITRAGE TRADE1. Arbitrage is not An Intraday Trade

2. Last Traded Price is not the Price for Arbitrage• If you are seeing a price difference of few Rupees in both the exchanges

does not always means there is an arbitrage. • Take an example of Weizmann Forex.

109

• So if you see the offer price and bid price in both the exchanges they are• Offer price in NSE is 74.90 for 48 shares.• Bid price in BSE is 67.30 for 50 shares.

• So if you execute the trade then your offer price should be 67.30 in BSE and Bid Price in NSE as 74.90 and that would mean you are buying high and selling low making a loss and not a profit arbitrage.

• So arbitrage exists only if you have higher bid price and lower offer price in either of the exchanges.

110

3. Arbitrage Trades should never be Manual

• As a retail investor we may be able to spot some arbitrage opportunities but if you try to key in those trades manually, the opportunity may be gone because there are so many big traders who have automated software running for spotting such arbitrages and execute those trades

111

ARBITRAGE OPPORTUNITIES

112

CAPITAL REQUIREMENT

Net worth = Capital + free reserve – Non allowable share

Deposit Requirement: Interest free security Deposit (IFSD) - Liquid cash Collateral Security Deposit (CSD) - Cash or Non cash form

113

RISK MANAGEMENTSound risk management system is integral to an efficient clearing and settlement

system:

• Capital adequacy requirements of members

• NSCCL - comprehensive risk management system, which is constantly

upgraded to pre-empt market failures

• Standard Portfolio Analysis of Risk (SPAN) - calculates performance

bond/margin requirements

• IT - monitors track record of member (net worth, position and exposures of

each member)

• Screen based trading system

114

CAPITAL ADEQUACY REQUIREMENTSTrading members are required to provide liquid

assets which adequately cover various margins & minimum capital requirements

Capital Adequacy Norms for Membership (₹ in lakh)

Particulars CM and F&O segment

CM, WDM, and F&O segment

Net Worth 100 200

Interest free security deposit

125 275

Collateral security deposit

25 25

115

BASE MINIMUM CAPITALAll Members are required to maintain a BMC with

Stock Exchange in the prescribed manner at all times.Members shall maintain the prescribed BMC based

on their profiles.

Category BMC Deposit

Only Proprietary trading without Algorithmic trading (Algo)

10 Lacs

Trading only on behalf of Client (without

proprietary trading) and without Algo

15 Lacs

Proprietary trading and trading on behalf of Client without Algo

25 Lacs

All Trading Members/Brokers with Algo 50 Lacs

116

BASE MINIMUM CAPITALBreak-up of BMC:

Cash Minimum 12.5%

Fixed Deposit Receipt(s) or Bank Guarantee(s) issued by bank(s)

(minimum 37.5%)

balance in the form of eligible shares

The eligible shares for the purpose of the securities portion of the

BMC are A and B group securities.

BMC is not available for adjustment towards margins.

117

MARGINSMargin – key part of Risk management system

Various kinds of margins imposed on the Members

based on their outstanding positions in the market.

TYPES OF MARGINS

VAR EXTREME LOSS

MARK – TO -

MARKET

118

VAR MARGIN

VAR Margin is at the heart of margining system for

the cash market segment.

It answers the question, “How much is it likely to

move over next one day?”

119

EXTREME LOSS MARGINThe Extreme Loss Margin for any stock is higher of:

5%, or 1.5 times the standard deviation of daily logarithmic returns

of the stock price in the last six months.

It is collected/adjusted against the total liquid assets of the member on a real time basis.

It is also collected on the gross open position of the Member.

No netting of positions across different settlement

120

MARK-to-MARKET MARGINMark to market margin is calculated by marking each transaction in

scrip to the closing price of the scrip at the end of trading

The MTM is computed after trading hours on T day on the basis of closing price, of that day

MTM is collected first by adjusting the same from the available liquid assets and the balance MTM in form of cash from the Member

121

SPECIAL MARGINS

• Imposed by BSE from time to time on certain scrips as a surveillance

measure and informed to the members through notices.

• Collected first, by adjusting the same from the available liquid assets

and the balance in form of cash from the Members through their

clearing banks on the same day

• Released on completion of pay-in of the settlement

122

MARGIN SHORTFALL In case of any shortfall in margin:

The members are not permitted to trade with immediate effect.

Penalty for margin violation

Instances of Disablement Penalty to be levied1st instance 0.07% per day

2nd to 5th instance 0.07% per day + Rs 5000/- per instance from 2nd to 5th

6th to 10th instance 0.07% per day + Rs20,000 (for 2nd to 5th instance) + Rs10000 per instance from 6th to 10th

11th instance onwards 0.07% per day + Rs70000( for 2nd to 10th instance) + Rs10000 per instance from 11th instance onwards. Additionally member referred to Disciplinary committee for suitable action

123

GROSS EXPOSURESE uses this Gross Exposure Limit as a tool to control the activities of

the brokerThe maximum permissible gross exposure is a multiple of the Net

Total Base Capital (NTBC) available and is determined as under :

Members exceeding these limits are automatically and instantaneously disabled by the automated trading system. A penalty of ₹ 5,000 is levied.

Total Base Capital ( Crore)₹ Gross Exposure Limit0-1 8.5 times the NTBC>1 ₹ 8.5 crores plus 10 times the

total base capital in excess of 1 ₹crore

124

SETTLEMENT GUARANTEE FUND

Provides the cushion for any residual risk

Funded through the contributions made by trading members, transaction charges, penalty amounts, fines etc.

A part of the cash deposit and the entire security deposit of every clearing member - converted into an initial contribution towards the Settlement Guarantee Fund

As an when volumes of business increase, members may be required to make additional contributions allowing the fund to grow along with the market volumes.

125

BROKERS CONTINGENCY FUND

To ensure - settlement cycles at the Exchange are not affected due to the temporary financial problems

Active members are required to make an initial non-refundable contribution of ₹1,000/- to the Fund and also contribute ₹ 0.075 for every 1 Lac rupees of gross turnover

Advance from the Fund up to a maximum of six times in a financial year Interest Rates:

• For the first three times in a financial year @12% p.a.• For the next three times in a financial year @15% p.a.

Advance up to a maximum of ₹25 lakhs.

126

TRADE GUARANTEE FUND

To ensure that the market equilibrium is not disturbed in case of

payment default by the members

To ensure timely completion of settlements of contracts and thereby

protect the interest of investors

Every member is required to provide to the Fund a bank guarantee of

₹10L

Contribution of ₹ 0.01 for every ₹ 1L of gross turnover made by the

member

127

INVESTOR PROTECTION FUND

IPF is utilized to settle claims of such investors whose trading member

has been declared as defaulter

Maximum amount of claim payable from the IPF to an investor is

₹11 L

Members contribution to the Fund is ₹ 0.15 per ₹ 1L of gross turnover

Interest earned by SE on security deposit kept with it by the

companies making public/rights issues is credited to the Fund

128

CONTROL OF RISKKYC Scheme

Database of lost, Stolen , Misplaced Securities

Client Caution Database

Verification of shares at members office

Inspection

129

KNOW YOUR CLIENT (KYC)Member brokers have to compulsorily obtain detailed information

of not only the new clients, but also the existing clients

This information should be made available to the Stock Exchanges

In case the member brokers fail to furnish the same it is viewed

seriously.

130

DATABASE OF LOST, STOLEN, MISMATCH SECURITIES

Stock Exchange maintains database of the report

Reports are developed by the Companies/Registrars

Database is updated regularly

Also used by the Clearing House

Defaulting person can be a broker or a client and strict action would be

taken against that person

131

CLIENT CAUTION DATABASERisk Management Department along with the Bad Delivery Cell

maintain client database

It is downloaded by the Member Brokers whenever a new client is

been admitted for verification purpose.

132

VERIFICATION OF SHARES AT MEMBERS OFFICE

Purchasing or Selling of shares more than ₹ 10L

This method of Risk Management is important there

exists a large volume of deliveries

133

INSPECTION

The department is carrying out inspection of the

member brokers records as regards compliance of

the risk management procedures.

134

THANK YOU!

135