22 07 2011 ANMI Members Meet on Compliance and Inspection

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    26Ju

    ly2011

    O

    erview

    ofC

    m

    pliance

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    Com liance re uirements

    o Compliancemeansensuringconformityandadherencetoregulatoryacts,rules,, , , .

    o Compliancerequirementbroadlyflowfromtherelevant provisionsofSCRA1956;

    SCRR

    1957,

    SEBI

    Act,

    Rules,

    Regulation

    and

    Circulars

    ,Rules,

    Regulations,

    Byelaws &CircularsofNSEIL&NSCCL

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    Compliance V/s Business Dilemma

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    Benefits of Compliance

    BusinessContinuity

    Com liance&RiskMana ement lessrisk lessbaddebts

    Compliance&

    Growth

    (introduction

    of

    new

    products)

    Compliance&Credibility(clientconfidence)

    Reputation&Goodwill(inthemarketplace&withregulators)

    Healthy

    Financials

    better

    liquidity RobustInternalcontrols

    Compliance&Peaceofmind

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    Compliance and Regulatory

    equ remen s

    RequirementstobeadequateneitherExcessivenorInadequate

    Exchange

    monitors

    level

    of

    compliance

    by

    analyzing

    data/

    Information/

    submissionsavailablewiththeExchange

    theInspection

    Inspectionaregulatory

    requirements

    &

    atool

    to

    monitor

    level

    of

    compliance

    Inspectionstoberiskbased,swift&valueadding

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    Commonl ound Observations

    Observationsarebroadlycategorizedintothefollowingareas

    ClientRegistration

    Provisions ofTrading

    Dealings withClients

    MarginReporting

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    Client Registration

    o Non Execution of documents KYC /MCA / RDD, Incomplete Documents/noseparate dockets

    o Contradictory clauses in voluntary or mandatory documents/ Jurisdiction

    o Non Collection of documents/details like address/identity/PAN/ Bank/ DP

    o Non delivery of set of documents executed to clients

    o Non compliance of requirements as per December 03, 2009 circular of SEBI

    o Index page not maintained

    o Clients countersi n a ainst the se ment exchan e in KYC not obtained

    o Identity & address of the introducer not captured in KYC

    o Details of action taken against a client not obtained

    o Financial information & supporting documentary evidence not obtained

    o Updation of financial information and periodic reviews not done

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    Provisions o PMLA

    ccoun open ng proce ure- n oney aun er ng

    Requirements

    C ient Due Client Policy for Classification ofDiligence Identification

    procedureclients & risk

    based approach

    ients o speciacategory (CSC)

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    Provisions of PMLA (Cont)

    o Verifytheclientidentityusingreliable,independentsources,documents,data

    orinformation.

    o Verifytheidentityofbeneficialowneroftheclient and/orthepersonon

    whosebehalftransactionsaretobeconductedandobtainsufficientdetails

    o

    Ensure

    that

    no

    account

    is

    opened

    in

    a

    fictitious

    /

    benami

    name

    or

    where

    the

    intermediaryisunabletoapplyappropriateCDDmeasures/KYCpolicies

    ,

    perception

    o Clientsof

    special

    category

    like

    NRI,HNI,Trust,NGO,PEP,

    Non

    face

    to

    face

    etc.to

    beclassified ashighriskclientsandcloselymonitored

    o Clienttransactionsnottobedisproportionatetotheirfinancialstrength

    o

    o Theidentity

    records

    of

    clients

    to

    be

    preserved

    for

    aperiod

    of

    10

    years

    from

    thedateofcessationofthetransactionsbetweentheclientandintermediary

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    Dealin s with Clients Cont...

    RUNNINGACCOUNT AUTHORIZATION

    o Runningaccountauthorizationisvoluntaryatclientsdiscretion

    o Authorizationshallbedatedandcontainaclause,statingthatclientcan

    revokeauthorization

    at

    any

    time.

    o Authorization shall be si ned b the client onl & not b an POA holder.

    o Ifamemberhasobtainedsuchauthorizationfromtheclient,themember

    authorizationshallcontinuetillthesameisrevokedbytheclient

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    Dealin s with Clients

    SETTLEMENT OF FUNDS &SECURITIES

    o Incaseofrunningaccountcompulsorysettlementtobedoneon

    monthly/quarterlybasisasperclientpreference,acrossthesegments

    o

    Retention

    of

    funds

    and

    securities

    at

    the

    time

    of

    settlement

    may

    be

    as

    under Derivativemarket tradingmembermayretainupto175%ofmarginrequirement

    Capitalmarket tradingmembermayretainentireoutstandingpayinobligation

    offunds&securitiesandvalueoftransactionsexecutedonthedayofsettlement.

    o Nointer

    client

    ad ustment

    for

    the

    ur ose

    of

    settlement

    o Issuestatementoffunds&securitiesalongwithretentiondetails

    o Passcorporatebenefitslikerights,bonus,dividendetctorespectiveclients

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    Dealings with Clients (Cont...)

    COMPLIANCES RELATED TO POA

    svo un aryan a c e n sso e scre on

    ShallnotgiveanyexclusiverightorcontrolovertheDPaccountorledgeraccountorbankaccountofclient

    POAshouldbeusedforthepurposespermittedbySEBI

    POAshouldnotpermit

    Transferofsecuritiesforoffmarkettrades

    OpeningatradingorDPaccountinthenameofclient

    xecu e ra es n enameo ec en w ou sconsen

    ProhibitissueofDeliveryInstructionSlipstoclient.

    Prohibitclient(s)fromoperatingtheaccount

    Allow

    merging

    of

    balances

    (dues)

    under

    various

    accounts

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    Margin Reporting

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    Mar in Re ortin Cont...

    COLLECTION OF MARGINS

    o Marginsareanimportantelementof theriskmanagementsystem

    o em erss ou aveapru en sys emo r s managemen opro ec themselvesfromclientdefault.

    o Thesame

    shall

    be

    well

    documented

    and

    be

    made

    accessible

    to

    the

    clients

    andtheStockExchanges.

    o Inthecashsegmentthequantumofthesemarginsandtheformandmodeofcollectionarelefttothediscretionofthemembers

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    Margin Reporting (Cont...)

    COLLECTION OF MARGINS DERIVATIVES

    SEGMENTo In the Derivatives segment members are required to collect and report

    details of upfront margins collected from all their Clients

    o ra ng mem er can repor c en marg n e a s o c ear ng corpora on

    upto T+2 day

    o Non reporting is considered as 100 % shortfall

    o Margins should be available with the member and should be in approvedforms only (Liquid securities / free funds)

    o Penalt would be im osed in case of shortfall or wron re ortin

    o In case of non receipt of payin of funds/ securities beyond a reasonabletime gap, not desirable to allow further positions

    o xposure a owe o c en s s ou e n propor on o marg ns an

    financial strength

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    Trading Terminals

    authorised persons offices

    o No extension of NEAT terminal without prior approval of the Exchange.

    o To be operated by approved persons only.

    o Upload trading terminal details to the Exchange before activation.

    o All information to be correctl u loaded in the rescribed format articularluser name, location and terminal id.

    o Any change in the details to be immediately updated in Exchange records.

    o ra ng o e one on y rom ra ng erm na s ena e or ra ng

    o Trading terminals in the CM/ F&O/Currency segment to be operated by usershaving valid certifications only.

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    Other Observations / Bad practices

    Misutilizationofclientfunds/securitiesfortheuseofself/otherclients

    inthe

    back

    office

    to

    different

    clients

    accounts

    Modificationofclienttradesandtransferprofitabletradestorelatedentities

    un ng oc en s yse roug

    Consideringchequesnotdeposited/heldinhandforsubstantialperiodswhile

    reporting

    margins

    to

    the

    exchange nexp a ne useo un sra se yp e geo c en secur es

    Unauthorizedtradesinclientsaccounts

    Surveillance/Risk/Backofficefunctionsnotsegregatedleadingtofraud

    AcceptanceofCash/DD/payorderandcredittootherclientaccounts

    Offeringfixreturns/creationofemailIDsofclients

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    New Regulatory Requirements

    PREFUNDEDINSTRUMENTS

    o In case of payment received through prefunded instruments, like, Pay Order,Demand Draft, Bankers cheque etc. members need to ensure that the fundsare not received from third parties.

    o If the value of prefunded instruments is Rs. 50,000/ or more, per day perclient, the stock brokers may accept the instruments only if the same areaccompanied by proofs like

    oftheissuingbank.

    Certifiedcopyoftherequisitionslip(portionwhichisretainedbythebank)toissue

    theinstrument.

    Certifiedcopyofthepassbook/bankstatementfortheaccountdebitedtoissuetheinstrument.

    Authenticationofthebankaccountnumberdebitedandnameoftheaccountholderb theissuin bankonthereverseo theinstrument.

    o

    Members should also maintain an audit trail of the funds received throughelectronic fund transfers to ensure that the funds are received from theirclients only.

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    New Regulatory Requirements

    ...RESPONSIBILITY OFCOMPLIANCE OFFICERS

    o Keep check on Type of Investor complaints received

    o To re ort Arrest conviction of ke officials

    o Report activities carried out, if any, in any business other than that of

    securities.

    o To report if Membership to the stock Broker or Group Company is refused by

    any Regulator

    o Technology failure at Stock broker entity impacting servicing of more than

    25% of its customers.o Financial disputes before various Government organization / bodies created

    under Act of Parliament involving a value of more than 25%, on cumulative

    basis of the Networth of the Stock Brokin entit

    o Any other important event

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    New Regulatory Requirements

    ...ONLINE CLIENT CODE MODIFICATION

    o Client Code Modification for Non institutional clientsto be fined at SEBI prescribed rates

    o Fine levied to be 1% or 2% of the value of tradesmodified during a month as may be applicable

    o Avoid back office transfer of trades

    NISMCERTIFICATION FOR PERSON DEALIN WITH CLIENT

    o All persons associated with stock brokers need to get Certified if they areinvolved with or deal with any of the following

    Assets / funds of clients or Redressal of Invertor grievance or activities

    having bearing on operational risk

    o All employees of trading member should be certified as under

    New employees within 1 year from date of circular Existing employees should obtain certification within 2 years

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    NEWREGULATORYREQUIREMENTS

    ...MARKET RUMORS

    o Stock broker should have proper systems to ensure that

    Employees temporarystaff voluntaryworkersetc.donotencourageor

    circulaterumors

    or

    unverified

    information

    AccesstoBlogs/Chatforums/Messengersitesetc.shouldeitherbe

    restrictedundersupervisionoraccessshouldnotbeallowed

    LogsforanyusageofsuchBlogs/Chatforums/Messengersites(calledbyany

    nomenclature)should

    be

    maintained

    by

    members

    Employeesshouldbedirectedthatanymarketrelatednewsreceivedby

    themeitherintheirofficialmail/personalmail/blogorinanyother

    manner should be orwarded onl a ter the same has been seen and

    approvedbytheComplianceOfficer

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    IssueofFAQonDealingsbyNRIs

    Reviewofdetailsincludedincompliancecalendar handbook

    consolidatedcircular

    with

    reference

    to

    recent

    circulars

    Memberseducationoncompliancerequirements

    Conductingcompliancevisitsforcreatingawarenessamongnewmembers

    Initiatedreviewofclientregistrationdocumentstomakethesamecost

    effectiveand

    user

    friendly

    ClarificationsregardingPowerofAttorneysobtainedfromclientsoftradingmembers

    Clarificationsregardingprefundedinstruments

    Clarificationregardingundertakingforrunningaccountmaintenance

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    QUESTIONS ???