Back Office Operations Final

8/4/2019 Back Office Operations Final

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Back office operations Intro

The operations division is also known as the 'back office'. Unlike the traders,

sales people, capital markets bankers and corporate financiers of the 'front

office', operations staff dont liaise with customers to generate revenues and

profits for the bank. Instead, the division is a support function operationsprofessionals support people in the front office to make sure everything works

smoothly and the institute runs smoothly on the surface.

The operations division is at the core of processing every transaction at the

bank. It links all the control processes to help protect the institutes

operations and reputation. Operations staff work closely with the other

divisions trading, sales, technology, market risk, credit, compliance, tax and

legal as well as external clients to help facilitate business and provide

guidance and direction, especially with new products.

All institutes have back-office support teams. Back-office functions are so

broad that operations staff typically specialise in only one of these areas.

Typical functions include settlement of securities and derivatives including

Forex and commodities, reconciliations, issuance of new securities through

Initial Public Offerings (IPOs), and processing of asset servicing. At its

centre is the core function of clearing and settling trades.

Clearing trades involves looking at the records made by the investors and

traders when they buy and sell shares or other financial products, and checking

that they match the records kept by the people from whom or to whom the shares

were bought or sold (the counterparties). People who work in settlements'settle' trades or ensure the stocks or shares bought and sold by the banks

traders are exchanged for the correct amount of money. Settlements covers

everything from preparing the documentation required for a sale, to making sure

the bank has been paid for all the shares it has sold and bought.

Indian Financial System

The financial system comprises a variety of intermediaries, markets, and

instruments. It provides the principal means by which savings are

transformed into investments. Given its role in the allocation of resources,the efficient functioning of the financial system is critical to a modern

economy.

A conceptual Framework of how the financial system works:-


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The Financial System


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The financial system performs the following interrelated functions that are

essential to a modern economy:

It provides a payment system for the exchange of goods and services.

It enables the pooling of funds for undertaking large-scale enterprises.

It provides a mechanism for managing uncertainty and controlling risk.

It generates information that helps in coordinating decentralized decision

making.

It helps in dealing with the incentive problem when one party has an

information advantages.

What Is A Stock Exchange?

A stock exchange is simply a market that is designed for the sale and purchase

of securities of corporations and municipalities. This means that a stock

exchange sells and buys stocks, shares, and other such securities. In addition,

the stock exchange sometimes buys and sells certificates representing

commodities of trade.

At first, stock exchanges were completely open. Anyone who wished to buy or sell

could do so at a stock exchange. However, to make stock exchange more effective,membership became limited to those in clubs and other associations. Today,

professionals who have a seat at the exchange are the people who trade at the

exchange.

Stock markets affect the entire economy and encourage investment. In the United

States, larger cities including Boston, New York, Philadelphia, Denver, Chicago,

Los Angeles, and San Francisco all have stock exchanges. Major cities across the

world also have exchanges of their own.

Not all stocks are listed on exchanges. Some are sold on the so-called over-

the-counter market, which means that they are sold and bought directly by

brokers. This method of buying became especially important during the early

1980s. Today, online stock exchange is even more covalent. Thanks to the growth

of the Internet almost anyone can sell and buy stocks online. Investors simply

tell their banks or investment brokers online what they wish to trade and when

and the brokers hired by the online trading system buy or sell stocks for the

client electronically.


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How Does A Stock Exchange Work?

Traditionally

The buying and selling of stocks at the exchange is done on an area which is

called the floor. All over the floor are positions which are called posts. Each

post has the names of the stocks traded at that specific post. If a broker wants

to buy shares of a specific company they will go to the section of the post that

has that stock. If the broker sees at the price of the stock is not quite what

the broker is authorized to pay, a professional called the specialist may

receive an order. The specialist will often act as a go-between between the

seller and buyer. What the specialist does is to enter the information from the

broker into a book. If the stock reaches the required price, the specialist will

sell or buy the stock according to the orders given to them by the broker. The

transaction is then reported to the investor.

If a broker approaches a post and sees that the price of the stock is what theyare authorized to pay, the broker can complete the transaction themselves. As

soon as a transaction occurs, the broker makes a memorandum and reports it to

the brokerage office by telephone instantly. At the post, an exchange employee

jots down on a special card the details of the transaction including the stock

symbol, the number of shares, and the price of the stocks. The employee then

puts the card into an optical reader. The reader puts this information into a

computer and transmits the information of the buy or sell of the stock to the

market. This means that information about the transaction is added to the stock

market and the transaction is counted on the many stock market tickers and

information display devices that investors rely on all over the world. Today,

markets are instantly linked by the Internet, allowing for faster exchange.


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Working of the Stock Exchange.

Buyer-A/ Seller-A Depository

Participant

Broker- A

NSENSDL

Broker-B

Buyer-B/Seller-B Client Depository

Participant

Settlement of shares Settlement of money

Detailed explanation with example:-

Buyer-B of Broker-B purchases 100 shares Reliance from Broker-A at the

same time Seller-A sells 100 shares of Reliance to Broker B through

Broker-A then following procedure take place

B pays to broker-B the amount due on the shares purchased by him.

Broker-B pays the settlement amount to NSE (Funds Pay in)NSE pays the amount to the Seller Broker-A

Then Seller Broker-A pays the amount to seller-A (Funds Pay out)

Simultaneously Seller-A delivers 100 Reliance to Broker-A in

his depository account (Shares Pay in)

Broker-A delivers the shares to NSDL through his Depository

Participant.

NSDL then gives the shares to broker-b

Finally Broker-B delivers the shares to Buyer-B (Shares Payout)


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An investor who wants to hold his securities in electronic form he has to

approach a Depository Participant and through him open an account at

NSDL. After getting Client I.D. no. from NSDL then client goes to a

registered broker of NSE/BSE for investing in the shares. The client givesthe order to the operator seating on the NEAT software (National Exchange

for Automated Trading) for particular scrip at a specific price when the bidmatches on the screen the confirmation tag blinks with the scrip ISIN

no.(International Securities Identification Number) for which he has to take

the delivery and make the payment on T+2 basis, if he doesn t make the

payment it goes to Auction and he has to pay the penalty and the auction

price for the shares traded.

Existing Depositories in India

Presently there are two depositories in the country, namely National

Securities Depositories Limited (NSDL) and Central Depositories Services

Limited (CDSL).

NSDL was set up as the first depository company in the country; ithas been sponsored by the Unit Trust of India, NSE, State Bank of India,

HDFC Bank and City Bank. Its performs the following functions through

depository participants enables the surrender and withdrawal of securities

to, and from, the depository; it maintains investors holdings in the electronic

form; effects settlement of securities traded on the exchanges; it carries out

settlement of trades not done on the stock exchange (off market trades);

transfers of securities; electronic credit in public offerings of companies;

receipt of non-cash corporate benefits like bonus, rights, and so on inelectronic form; Stock lending and borrowing.

The Mumbai Stock Exchange in association with the Bank of

Baroda, State Bank of India and HDFC Bank have promoted CDSL as asecondary depository in India for dealing in securities, in the electronic

form, by the name of Central Depository Services (India) Limited (CDSL).

The main objectives are as to accelerate the growth of scripless trading; to

make a major trust in the individual investors participation in thedepository, to create a competitive environment which will be responsive to

the user s interests and demands, to enhance liduidity.

Role and Functions of Stock Market

The functions of the stock exchange are as follows:

1. The stock exchange provides a market place for purchase and sale of

securities.

2. Ensures the free transferability of securities.

3. Stock exchange provides readily available buyers for corporate stocks.

4. Stock Exchange provides readily available seller for the interested

investors.


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5. It mobilizes the savings from the household sector to the investment in the

corporate sector.

6. It helps the investor in analyzing the enterprises on the basis of growth

prospects, returns, risk with the information about factors affecting these

conditions like industrial policies, price controls, foreign exchangeregulations, etc.,

7. The members of the Stock Exchange also assist in regulating and floating a

new issue in the markets. They also act as the under-writers and brokers, all

over India.

8. Stock Exchange provides valuable data and information about the prices of the

securities on micro (company) and macro level (market level).

9. Stock Exchange has introduced various laws to keep a check on the speculative

activities in the markets and possesses the power and authority to prevent/penalizes excessive speculation, from either party, in order to ensure

disciplined trading.

10. It also provides a market place for the Government Securities

Safety of the Market:

A major objective of BSE is to promote and inculcate honourable and just practices of trade in

securities transactions, and to discourage malpractices.

The surveillance function at BSE has assumed greater importance over the last few years. It has a

dedicated Surveillance Department to keep a close, and a daily, watch on the price movement of

scrips, detect market manipulations like price rigging, etc., monitor abnormal prices and volumes

which are not consistent with normal trading pattern and monitor the Members' exposure levels

to ensure that defaults do not occur. This Department, which is headed by a General Manager,

reports directly to Managing Director.

As per the guidelines issued by SEBI, except for scrips on which derivative products are available

and are part of indices on which derivative products are available,a daily Circuit Filter of 20% is

applied on all scrips.Circuit filters ensures that the price of a scrip cannot move upward or

downward beyond the limit set for the day.BSE has imposed dummy circuit filters to avoid freak

trade due to punching errors by the Trading Members.

The abnormal variation in the prices as well as the volumes of the scrips are scrutinised and

appropriate actions are taken. The scrips which reach new high or new low and companies which

have high trading volumes are watched closely. A special emphasis is laid on the newly listed

scrips.


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In case certain abnormalities are noticed, the circuit filters are reduced to make it difficult for the

price manipulators to increase or push down the prices of a scrip within a short period of time.

BSE imposes special margins in scrips where it suspects an attempt to ramp up the prices by

creating artificial volumes. BSE also transfers the scrips for trading and settlement to the trade-to-

trade category which leads to giving/taking delivery of shares on a gross level and no intra-

day/settlement netting off/squaring off facility is permitted. If abnormal movements continuedespite the aforesaid measures, BSE suspends the trading in the scrip.

Detailed investigations are conducted in cases where price manipulation is suspected and

disciplinary action is taken against the concerned Members.

BSE has an On-line Real Time (OLRT) Surveillance System, which has been in operation since July

15, 1999. Under this system, alerts are generated on-line, in real time during the trading hours,

based on certain preset parameters like the price and volume variation in scrips, a Member taking

unduly large positions not commensurate with their financial position or having concentrated

positions in one or more scrips.

This system integrates several databases like company profiles, Members' profiles and historical

data of turnover and price movement in scrips, Members' turnovers, their pay-in obligations, etc.

Back office functioning

This report is about the study undertaken by me during a period of twomonths for my summer project in Pune Stock Exchange. The Back office

function acts as a back bone of any share broking firm as the work which the

personnel in back office has to perform is very crucial and important for the

client as well as the firm. Any mistake from the personnel might become a

liability for the firm, for e.g. if there is short delivery or pay in of clients

share then for those shares auction takes place for which they have to paythe price for the same. Hence the back office function calls for the full

concentration level of the personnel while doing his or her work.

If the back office section detects any error it should draw the attention

of the higher authority for the corrective action. Basically the back office

function includes responsibilities like transaction processing, settlement andother administration functions.

So the key result activity in a share broking firm is the back office

function which operates through different department like Crd department,

Delivery department, Accounts Department, Compliance department etc.


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Departments

1. Client registration Department (CRD)

In order to trade in the market the client has to fill up the agreement

between the Client-Broker-Sub broker which is know as tripartite

agreement and also know your client forms with necessary requirementattached to it, has to been send to CRD. In the mean while the client or sub

broker has to feed the all information in masters and has to submit it in s/wwhich can viewed by the client broker and sub brokers end. After

receiving the forms the employees in the CRD verifies it and checks with

the master, and everything is matched, it gives instructions for the

activation of the client to the surveillance department. And once it get

activated CRD informs to client by putting the details in the ftp site which

can be viewed at their end and can start trading.

And if the details do not match or any particular attachment is not there

then they inform through ftp site where the client and sub broker can view

the current status. If any changes has to made like change in name oraddress or in brokerage they have to inform to CRD and they get it

changed.

2. Delivery and Accounts Department

Basically the employees in the Delivery department have to look

after the pay in and pay out of shares and Accounts department has to look

after the pay in and pay out of funds.

a. Pay in of shares

Now a days pay in of the shares is done automatically which is

known auto delivery out. NSE/BSE has the record of how much

pay in of shares is due from the seller s broker. The bank in whichthe broker has his account, which is only for clearing member, the

download of auto delivery out is taken through the NSE s site.

Then the broker gets the print out of the delivery out report which

shows whether nsdl/cdsl has received the pay in correctly or not.

After confirming it from the bank the shares are sent from pse

account to nse/bse and confirm the pay in. Suppose if they are any

short delivery of shares then nse/bse gives debit to the pse accountand similarly brokers debit it to sub brokers/clients account and

then nse/bse can charge penalty for short pay in.

b. Pay out of shares and funds When shares are purchased bythe client then he gives money to sub broker which he delivers

to pse and pse sends to nse/bse as funds pay in against whichnse/bse gives payout of funds and also gives delivery of shares

to pse and in return pse gives the pay out of shares and payoutof funds to the respective sub brokers at present T+2 basis,

which means the day of trade plus two days within which the


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pay in and pay out of shares and funds should take placesimultaneously.

c. Intersettlement transaction Intersettlement transaction are the

necessary adjustments between the broker and the client for

which client has to give request to the broker, for e.g. if the

client has sold 20 share of reliance in settlement number 154,but if the client request to broker/ sub broker to adjust this pay

in against the payout in settlement number 158 then it is called

as inter settlement transaction.

d. Cash management and transfer of funds Cash/ funds is the

lifeblood of any organization so management of cash and

transfer of funds form a very important aspect of the accounts

department. This includes constant check and reconciliation of

the bank account of the sub broker.

e. Preparation Bank Reconciliation statement Bankreconciliation state is very important as it helps the accountant

to understand the balance of cash in the respective bankaccount and if there is any difference between in balance as per

the sub brokers book and as per our books it has to be rectified

immediately and should be informed immediately. There could

be many reasons because of which there can be indifference in

cash and bank balances and doing bank reconciliation

statement can rectify these difference.

f. Preparing the cash statement This statement gives the details

of the transactions of previous days. It shows all the debits and

credits given to each and every client, margin from the subbroker, net balances, net stock payment(normal/auction) andnet stock receivable(normal/auction)

g. Checking the Daily Funds Statements Daily funds give the

details of pay in and pay out of funds and also show whether it

was normal or auction. This report has to be checked by the

accountant and find whether there is any short delivery, if yes

then get the short delivery report from the delivery department.

h. Undertake the work of recovery as well The job of recovery

is very is very difficult and this is one of the important

functions of the accounts personnel for this he has to be very

shrud person and see that the job is done.

3. Compliance Department

Compliance has acquired a lot of importance these days as there are

penalties if you fail to comply as per the requirement of nse. For those

purpose of compliance pse has to submit a compliance report to nse s


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inspection and investigation department signed by the Managing directoron the behalf of the company under the common seal. They have to inform

to sub broker regarding the inspection or meetings which are duly held

like AGM, has to prepare minutes of the meeting, has to inform anychanges in rules, regulations and laws etc

4. Surveillance Department

As the securities transactions are prone to verity of manipulations, the nsehas instituted a strong surveillance mechanism to protect market integrity.It includes-

Online monitoring - The National Securities Clearing Corporation Ltd.

has in place an online monitoring and surveillance system whereby

exposure of the member is monitored on a real time basis. A system of

alerts has been built in so that both the member and NSCCL are altered as

per pre-set levels (reaching 70, 85, 95, and 100 percent) when the

members approach their allowable limits. The system enables the NSCCL

to further check the micro details of members positions, if required, andtake proactive action.The online surveillance mechanism also generates various alerts/ reports

on any price/volume movement of securities not in line with past

trends/patterns. For this purpose, the nse has put in place a system that

generates alerts. Alerts are scrutinized and are taken up for follow up

action. Open positions of securities are also analyzed. Besides this,

rumours in the print media are tracked and, where they are sensitive,

companies are contacted for verification. Replies are informed to the

members and the public.Investigation and inspection As per regulatory requirements, a minimum

of 10% of the active trading members are to be inspected every year toverify the level of compliance with various rules, byelaws and regulations

of the nse. Usually, inspection of more members than the regulatory

requirement is under taken every year. The inspection randomly verifies if

investor interests are being compromised in the conduct of business by

members. The investigation is based on various alerts which requirefurther analysis. If the analysis suggest any possible irregular activity

which deviates from trends/patterns and concentration of trading at the

nse, at the member level, then a more detailed investigation is undertaken.

If the detailed investigation establishes any irregular activity, then

disciplinary action is initiated against the member. If the investigation

suggests possible irregular activity across the exchange and/ or possibleinvolvement of clients, then the same is informed to the SEBI.

5. Depository participant (DP)

Once the trade is done on the stock exchange, client/sub broker

gets reports of their net obligation. A clearing member (CM) has to open aclearing and settlement of trades with a DP. On opening of such account

an account, the depositories allots a number identified as CM- Business


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partner- Id. The DP opens an account and the CM is allotted a number

(Client ID).

The delivery account consists of three parts pool a/c; delivery

a/c; receipt a/c, to facilitate easy book keeping. The role of the pool

account in clearing of securities is two fold- a.) the selling client of the

CM transfers securities from his client account to the pool a/c of the CMbefore pay in and b.) after payout, the CM transfers securities(to the extent of

his obligation to the clearing operation) from the pool a/c to the

delivery a/c , before pay in. On pay in day the depository flushes out the

securities in the delivery a/c and transfers the same to CC automatically.

On pay out day, the CC transfers securities to the pool a/c (to extent of the

net receipt) through the receipt a/c. This account can be used to trace the

details of settlement-wise receipt into the clearing.

On off market trades, these include trades where the seller and buyer deal

directly with each other, without any intervention of the CC. The seller

would give his DP a delivery instruction slip instructing him to debit his

account with the transacted securities and the buyer would give his DP a

receipt instruction slip to credit his account. Both the instructions would have

the same execution date. The transaction would match at the depository, and

credit and debit would be given by the DPs to their respective Client account.

Trading and General terms:

Listed Securities

The securities of companies, which have signed the Listing Agreement with BSE, are traded as "Listed

Securities". Almost all scrips traded in the Equity segment fall in this category.

Permitted Securities

To facilitate the market participants to trade in securities of such companies, which are actively

traded at other stock exchanges but are not listed on BSE, trading in such securities is facilitated as "

Permitted Securities" provided they meet the relevant norms specified by BSE

Tick Size

Tick size is the minimum difference in rates between two orders on the same side i.e., buy or sell,

entered in the system for particular scrip. Trading in scrips listed on BSE is done with the tick size of

5 paise.

However, in order to increase the liquidity and enable the market participants to put orders at finer

rates, BSE has reduced the tick size from 5 paise to 1 paise in case of units of mutual funds, securities

traded in "F" group and equity shares having closing price up to Rs. 15 on the last trading day of the

calendar month. Accordingly, the tick size in various scrips quoting up to Rs.15 is revised to 1 paise


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on the first trading day of month. The tick size so revised on the first trading day of month remains

unchanged during the month even if the price of scrips undergoes a change.

Computation Of Closing Price Of Scrips

The closing price of scrips is computed by BSE on the basis of weighted average price of all tradesexecuted during the last 30 minutes of a continuous trading session. However, if there is no trade

recorded during the last 30 minutes, then the last traded price of scrip in the continuous trading

session is taken as the official closing price.

Basket Trading System

BSE has commenced trading in the Derivatives Segment with effect from June 9, 2000 to enable

investors to hedge their risks. Initially, the facility of trading in the Derivatives Segment was confined

to Index Futures. Subsequently, BSE has introduced the Index Options and Options & Futures in

select individual stocks.

Investors in the cash market had felt a need to limit their risk exposure in the market to the

movement in Sensex. With a view to provide investors the facility of creating Sensex-linked

portfolios and also to create a linkage of market prices of the underlying securities of Sensex in the

Cash Segment and Futures on Sensex, BSE has provided to the investors as well as to its Members a

facility of Basket Trading System on BOLT with effect from August 14, 2000. In the Basket Trading

System, the investors through the Members are able to buy/ sell all 30 scrips of Sensex in one go in

the proportion of their respective weights in the Sensex. The investors need not calculate the

quantity of Sensex scrips to be bought or sold for creating Sensex-linked portfolios and this function

is performed by the system. The investors can also create their own baskets by deleting certain

scrips from 30 scrips in the Sensex. Further, the investors can alter the weights of securities in such

profiled baskets and enter their own weights. The investors can also select less than 100% weightage

to reduce the value of the basket as per their own requirements.

To participate in this system, the Members need to indicate the number of Sensex basket(s) to be

bought or sold, where the value of one Sensex basket is arrived at by the system by multiplying Rs.50

to the prevailing Sensex. For example, if the Sensex is 15,000, the value of one basket of Sensex

would be 15000 x 50= i.e., Rs. 7,50,000/-. The investors can also place orders by entering value of

Sensex portfolio to be brought or sold with a minimum value of Rs. 50,000 for each order.

The Basket Trading System provides the arbitrageurs an opportunity to take advantage of price

differences in the underlying Sensex and Futures on the Sensex by simultaneous buying and selling

of baskets comprising the Sensex scrips in the Cash Segment and Sensex Futures. This would provide

a balancing impact on the prices in both cash and futures markets.

The Basket Trading System thus meets the need of investors and also improves the depth in cash

and futures markets.

The trades executed under the Basket Trading System are subject to intra-day trading and gross

exposure limits available to the Members. The VaR, MTM margins etc, as are applicable to normal

trades in the Cash Segment, are also recovered from the Members.


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Netting:

Netting is the agreed offsetting of reciprocal obligations by trading partners

or participants in a system, including the netting of trading obligations, for

example, through a central counterparty, as well as agreements to settle

instructions to transfer securities or fund assets on a net basis. The result is

that delivery and payment obligations arising from trading are netted to reduce

the number of settlement transactions.

Settlement

Compulsory Rolling Settlement

All transactions in all groups of securities in the Equity segment and Fixed Income securities listed on

BSE are required to be settled on T+2 basis (w.e.f. from April 1, 2003). The settlement calendar,

which indicates the dates of the various settlement related activities, is drawn by BSE in advance and

is circulated among the market participants.

Under rolling settlements, the trades done on a particular day are settled after a given number of

business days. A T+2 settlement cycle means that the final settlement of transactions done on T, i.e.,

trade day by exchange of monies and securities between the buyers and sellers respectively takesplace on second business day (excluding Saturdays, Sundays, bank and Exchange trading holidays)

after the trade day.

The transactions in securities of companies which have made arrangements for dematerialization of

their securities are settled only in demat mode on T+2 on net basis, i.e., buy and sell positions of a

member-broker in the same scrip are netted and the net quantity and value is required to be settled.

However, transactions in securities of companies, which are in "Z" group or have been placed under

"trade-to-trade" by BSE as a surveillance measure ("T" group) , are settled only on a gross basis and

the facility of netting of buy and sell transactions in such scrips is not available.


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The transactions in 'F' group securities representing "Fixed Income Securities" and " G" group

representing Government Securities for retail investors are also settled at BSE on T+2 basis.

In case of Rolling Settlements, pay-in and pay-out of both funds and securities is completed on the

same day.

Members are required to make payment for securities sold and/ or deliver securities purchased to

their clients within one working day (excluding Saturday, Sunday, bank & BSE trading holidays) after

the pay-out of the funds and securities for the concerned settlement is completed by BSE. This is the

timeframe permitted to the Members to settle their funds/ securities obligations with their clients as

per the Byelaws of BSE.

The following table summarizes the steps in the trading and settlement cycle for scrips under CRS :

DAY ACTIVITY

T o Trading on BOLT and daily downloading ofstatements showing details of transactions andmargins at the end of each trading day.

o Downloading of provisional securities and fundsobligation statements by member-brokers.

o 6A/7A* entry by the member-brokers/ confirmation bythe custodians.

T+1 o Confirmation of 6A/7A data by the Custodians upto1:00 p.m. Downloading of final securities and fundsobligation statements by members

T+2 o Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by 1:30 p.m. Themember-brokers are required to submit the pay-ininstructions for funds and securities to banks anddepositories respectively by 10: 30 a.m.

T+3 oAuction on BOLT at 11.00 a.m.

T+4 o Auction pay-in and pay-out of funds and securities by12:00 noon and 1:30 p.m. respectively.


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The pay-in and payout of funds and securities takes places on the second business day (i.e.,

excluding Saturday, Sundays and bank and BSE trading holidays) of the day of the execution of the

trade.

The settlement of the trades (money and securities) done by a Member on his own account or on

behalf of his individual, corporate or institutional clients may be either through the Member himself

or through a SEBI registered custodian appointed by him/client. In case the delivery/payment in

respect of a transaction executed by a Member is to be given or taken by a registered custodian, the

latter has to confirm the trade done by a Member on the BOLT System through 6A-7A entries. For

this purpose, the custodians have been given connectivity to the BOLT System and have also been

admitted as clearing member of the Clearing House. In case a registered custodian does not confirm

a transaction done by a Member within the time permitted, the liability for pay-in of funds or

securities in respect of the same devolves on the concerned Member.

The following statements can be downloaded by the Members in their back offices on a daily basis.

h. Statements giving details of the daily transactions entered into by the Member.

i. Statements giving details of margins payable by the Member in respect of the trades

executed by him.

j. Statements of securities and fund obligation.

k. Delivery/Receive orders for delivery /receipt of securities.

BSE generates Delivery and Receive Orders for transactions done by the Members in A, B1, B2 and F

and G group scrips after netting purchase and sale transactions in each scrip whereas Delivery and

Receive Orders for "T", "C" & "Z" group scrips and scrips which are traded on BSE on "trade-to-trade"

basis are generated on a gross basis, i.e., without netting of purchase and sell transactions in a scrip.

However, the funds obligations for the Members are netted for transactions across all groups of

securities.

The Delivery Order/Receive Order provides information like the scrip and quantity of securities to be

delivered/received by the Members through the Clearing House. The Money Statement provides

scrip wise/item wise details of payments/receipts of monies by the Members in the settlement. The

Delivery/Receive Orders and Money Statement can be downloaded by the Members in their back

office

Pay-in and Pay-out for 'A', 'B', 'T', 'C', "F", "G" & 'Z' Group of Securities

The trades done on BOLT by the Members in all securities in CRS are now settled on BSE by payment

of monies and delivery of securities on T+2 basis. All deliveries of securities are required to be routed

through the Clearing House,


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The Pay-in /Pay-out of funds based on the money statement and that of securities based on Delivery

Order/ Receive Order issued by BSE are settled on T+2 day.

Demat pay-in

The Members can effect pay-in of demat securities to the Clearing House through either of the

Depositories i.e. the National Securities Depository Ltd. (NSDL) or Central Depository Services (I) Ltd.

(CDSL). The Members are required to give instructions to their respective Depository Participants

(DPs) specifying details such as settlement no., effective pay-in date, quantity, etc.

Members may also effect pay-in directly from the clients' beneficiary accounts through CDSL. For

this, the clients are required to mention the settlement details and clearing member ID through

whom they have sold the securities. Thus, in such cases the Clearing Members are not required to

give any delivery instructions from their accounts.

In case a Member fails to deliver the securities, the value of shares delivered short is recovered from

him at the standard/closing rate of the scrips on the trading day.

Auto delivery facility

Instead of issuing delivery instructions for their securities delivery obligations in demat mode in

various scrips in a settlement /auction, a facility has been made available to the Members of

automatically generating delivery instructions on their behalf from their CM Pool accounts

maintained with NSDL and CM Principal Accounts maintained with CDSL. This auto delivery facility is

available for CRS (Normal & Auction) and for trade-to-trade settlements. This facility is, however, not

available for delivery of non-pari passu shares and shares having multiple ISINs. Members wishing to

avail of this facility have to submit an authority letter to the Clearing House. This auto delivery

facility is currently available for Clearing Member (CM) Pool accounts and Principal accounts

maintained by the Members with the respective depositories.

Pay-in of Securities in Physical Form

In case of delivery of securities in physical form, the Members are required to deliver the securities

to the Clearing House in special closed pouches along with the relevant details like distinctive

numbers, scrip code, quantity, etc., on a floppy. The data submitted by the Members on floppies is

matched against the master file data on the Clearing House.If there is no discrepancy, the securities

are accepted.


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Funds Pay-in

The bank accounts of Members maintained with the clearing banks, viz., Bank of India, HDFC Bank

Ltd., Oriental Bank of Commerce., Standard Chartered Bank, Centurion Bank Ltd., Axis Bank Ltd.,

ICICI Bank Ltd, Indusind Bank Ltd., Union Bank of India and Hongkong & Shanghai Banking

Corporation Ltd. are directly debited through computerized posting for their funds settlement

obligations.

In case of Members whose funds pay-in obligations are not cleared at the scheduled time, action

such as levy of penalty and/or deactivation of BOLT TWSs , is initiated as per the prescribed penalty

norms.

Securities Pay-out

Demat securities are credited by the Clearing House in the Pool/Principal Accounts of the Members.

BSE has also provided a facility to the Members for transfer of pay-out securities directly to the

clients' beneficiary owner accounts without routing the same through their Pool/Principal accounts

in NSDL/ CDSL. For this, the concerned Members are required to give a client wise break up file

which is uploaded by the Members from their offices to the Clearing House. Based on the break up

given by the Members, the Clearing House instructs the depositories, viz., CDSL & NSDL to credit the

securities to the Beneficiary Owners (BO) Accounts of the clients. In case delivery of securities

received from one depository is to be credited to an account in the other depository, the Clearing

House does an inter-depository transfer to give effect to such transfers.

In case of physical securities, the Receiving Members are required to collect the same from the

Clearing House on the pay-out day.

Funds Payout

The bank accounts of the Members having pay-out of funds are credited by the Clearing House with

the Clearing Banks on the pay-in day itself

In case a Member fails to deliver the securities, the value of shares delivered short is recovered from

him at the standard/closing rate of the scrips on the trading day.


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Risk Management

Cash Market

The expansion of BOLT across the country has led to a significant increase in volumes and liquidity.

This has also consequently increased the risk of default by the Members in meeting their settlement

obligations. BSE has initiated several risk management measures in order to maintain the safety of

the market and to avert defaults by the BSE Members in meeting their payment and delivery

obligations.

Total Liquid Assets

The core of the risk management system is the liquid assets deposited by the Members with BSE.

These liquid assets cover the following five requirements:

Base Minimum Capital (BMC)


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All Members are required to maintain a BMC of Rs.10 lakhs with BSE in the prescribed manner at all

times. The composite corporate Members are required to maintain BMC in multiple of the

membership rights held by them. The BMC, as prescribed by SEBI, is required to be kept in the form

of cash (minimum 12.5%), Fixed Deposit Receipt(s) or Bank Guarantee(s) issued by bank(s)

(minimum 37.5%) and balance in the form of eligible shares. The eligible shares for the purpose of

the securities portion of the BMC are A and B1 group securities forming part of Group I classified as

per the parameters of volatility and liquidity as stipulated in SEBI circular No. MRD/DoP/SE/Cir-

07/2005 dated February 23, 2005. BMC is not available for adjustment towards margins.

Additional Capital

a. Members are also allowed to deposit Additional Capital (AC) over and above the BMC with

BSE as follows :

(Liquid Assets) :

Cash Equivalent.

Particulars

(i) Cash

(ii) Bank Fixed Deposit Receipts (FDRs ).

iii) Bank Guarantee

(iv) Securities of the CentralGovernment * .

(v) Units of liquid Mutual Fund (or)Govt. Sec. Mutual Fund (by whatevername called which invests ingovernment securities) *.

Other Liquid Assets - Non-Cash Component


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(Total of Other Liquid Assets should not exceed total of Cash Equivalent) :

Particulars

Non-Cash equivalent :(i) Liquid (Group-I) Equity Shares (asper the criteria for classification ofscrips on the basis of liquidity).

(Only A and B1 group securitiesforming part of such Group I)

(ii)Mutual Fund units (other than thoselisted under cash equivalent). *

Cash equivalents should be at least 50% of the liquid assets. This implies that Other Liquid Assets inexcess of the total Cash Equivalents is not regarded as part of the Total Liquid Assets.

b. MTM (Mark-To-Market) Losses: Mark-to-market losses on outstanding settlement

obligations of the Member.

c. VaR Margins: Value at risk margins to cover potential losses for 99% of the days.

d. Extreme Loss Margins: Margins to cover the expected loss in situations that lie outside the

coverage of the VaR margins.

e. Base Minimum Capital: Capital required for all risks other than the market risk (for example,

operational risk and client claims).

f. Special Margin : Special margin collected as a surveillance measure.

Members are required to maintain the liquid assets (collateral) to cover all the above five

requirements. There are no other margins in the risk management system.

1. Single Trade

2. Cumulative Trades for the Day

Immediately upon the execution of the order where the traded quantity, either buy

or sell ,on account of any trade is more than 0.5% of the number of equity shares of

the company listed on BSE.

Within one hour from the closure of the trading hours, where the cumulative

quantity traded under any single client code on that day either purchase or sale is

more than 0.5% of the number of equity shares of the company listed at BSE.


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The valuation of shares deposited by the Members with BSE is done on a daily basis, and a

hair-cut equivalent to the respective VaR of individual scrip is applied i.e., only the residual

value of eligible shares deposited is considered for the purpose of evaluation of

capital(collateral) deposited by the Members with BSE.. The eligible shares deposited by the

Members towards BMC are accepted by BSE in demat form only.

The cash can be deposited by the Members towards capital by submitting instructions to

their clearing banks to debit their bank accounts and credit the amount to BSE's account.

As regards the Fixed Deposit Receipts (FDRs) of banks, the duly discharged FDRs are required

to be submitted by the Members to BSE in the name of " Bombay Stock Exchange Ltd. A/c -

trade name of the Member" issued by any Mumbai-based branch or payable at any

Mumbai-based branch of any scheduled commercial or co-operative bank.

The bank guarantees submitted by the Member towards the capital have to be in the

approved format in favour of BSE either issued or payable by any Mumbai-based branch of a

scheduled commercial bank only. However, in case FDRs/ bank guarantees are issued by the

outstation branches of scheduled commercial banks (i.e., branches outside Mumbai), the

payment of the proceeds on encashment of FDRs and invocation of bank guarantees by BSE

has to be assured by a Mumbai-based branch of the concerned issuing bank.

Liquidity Categorization of Securities

The securities are classified into three groups based on their liquidity:

Group Trading Frequency (over theprevious six months seeNote A)

Impact Cost (over theprevious six months seeNote A

Liquid Securities (Group I) At least 80% of the days Less than or equal to 1%

Less Liquid Securities (Group II) At least 80% of the days More than 1%

Illiquid Securities (Group III) Less than 80% of the days N/A

The trading frequency and impact cost is calculated on the 15th of each month on a rolling

basis considering the previous six months for impact cost and previous six months for

trading frequency. On the basis of the trading frequency and impact cost so calculated, the

securities move from one group to another group from the 1st of the next month.


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Categorisation of Newly-listed Securities

For the first month and till the time of monthly review as mentioned above, a newly listed

stock is categorised in that group where the market capitalization of the newly listed stock

exceeds or equals the market capitalization of 80% of the stocks in that particular group.

Subsequently, after one month, whenever the next monthly review is carried out, the actual

trading frequency and impact cost of the security is computed, to determine the liquidity

categorization of the security.

In case any corporate action results in a change in ISIN, the securities bearing the new ISIN is

treated as newly listed scrip for group categorization.

Calculation of mean impact cost:

The mean impact cost is calculated in the following manner:

1.Impact cost is calculated by taking four snapshots in a day from the order book in the past

six months. These four snapshots are randomly chosen from within four fixed ten-minutes

windows spread through the day.

2.The impact cost is the percentage price movement caused by an order size of Rs.1 lakh

from the average of the best bid and offer price in the order book snapshot. The impact cost

is calculated for both, the buy and the sell side in each order book snapshot.

Dissemination of Information

The lists of securities forming part of groups I, II and III are disseminated on the BSE website on a

monthly basis.

Margins

In order to contain the risk arising out of transactions entered into by the members in various scrips

either on their own account or on behalf of their clients, BSE has a well designed risk-management


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system which inter-alia, includes collection of margins from the Members. BSE accordingly imposes

various kinds of margins on the Members based on their outstanding positions in the market. The

margining system followed by BSE is described below :

Computation of Margins

For securities that have been listed for less than six months, the trading frequency and the impact

cost is computed using the entire trading history of the scrip.

VaR Margin

As mandated by SEBI, the Value at Risk (VaR) margining system, which is internationally accepted as

the best margining system, is applicable on the outstanding positions of the Members in all scrips.

a. The VaR Margin is a margin intended to cover the largest loss that can be encountered on

99% of the days (99% Value at Risk). For liquid stocks, the margin covers one-day losses while for

illiquid stocks, it covers three-day losses so as to allow the Exchange to liquidate the position over

three days. This leads to a scaling factor of square root of three for illiquid stocks.

For liquid stocks, the VaR margins are based only on the volatility of the stock while for other stocks,

the volatility of the market index is also used in the computation. Computation of the VaR margin

requires the following definitions:

Scrip sigma means the volatility of the security computed as at the end of the previous trading day.

The computation uses the exponentially weighted moving average method applied to daily returns

in the same manner as in the derivatives market.

Scrip VaR means the higher of 7.5% or 3.5 scrip sigma.

Index sigma

means the daily volatility of the market index (S&P CNX Nifty or BSE Sensex) computed as at the end

of the previous trading day. The computation uses the exponentially weighted moving average

method applied to daily returns in the same manner as in the derivatives market.

Index VaR


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means the higher of 5% or 3 index sigma. The higher of the Sensex VaR or Nifty VaR would be used

for this purpose.

The VaR Margins are specified as follows for different groups of stocks:

LiquidityCategorization

One-Day VaR Scaling factor forilliquidity

VaR Margin

Liquid Securities (Group I) Scrip VaR 1.00 Scrip VaR

Less Liquid Securities(Group II)

Higher of Scrip VaR andthree times Index VaR

1.73

(square root of 3.00)

Higher of 1.73 times ScripVaR and 5.20 times IndexVaR

Illiquid Securities (Group III) Five times Index VaR 1.73

(square root of 3.00)

8.66 times Index VaR

Collection of VaR Margin :

a. The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of

the Member at the time of trade.

b. The VaR margin is collected on the gross open position of the Member. The gross open

position for this purpose is the gross of all net positions across all the clients of a Member including

his proprietary position.

c. For this purpose, there would be no netting of positions across different settlements.

d. Dissemination of Information :

The VaR amount applicable in respect of the scrips is disseminated on the BSE website on a daily

basis.

Extreme Loss Margin :

The term Extreme Loss Margin replaces the terms "exposure limits" and "second line of defense"

that have been used hitherto. It covers the expected loss in situations that go beyond those

envisaged in the 99% value at risk estimates used in the VaR margin.

e. The Extreme Loss Margin for any stock is higher of:

o 5%, and

o 1.5 times the standard deviation of daily logarithmic returns of the stock price in the

last six months. This computation is done at the end of each month by taking the

price data on a rolling basis for the past six months and the resulting value is

applicable for the next month.

f. The Extreme Loss Margin is collected/adjusted against the total liquid assets of the member

on a real time basis.


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g. The Extreme Loss Margin is collected on the gross open position of the Member. The gross

open position for this purpose means the gross of all net positions across all the clients of a member

including his proprietary position.

h. For this purpose, there is no netting of positions across different settlements.

i. The Extreme Loss margin so collected is released alongwith the pay-in.

j. Dissemination of Information :

The ELM amount applicable in respect of the scrips is also disseminated on the BSE website.

Special Margin :

Special margin may be imposed by BSE from time to time on certain scrips as a surveillance measure

and informed to the Members through notices.

Mark-to-Market Margin (MTM) :

a. The MTM margin is collected on the gross open position of the Member. The gross open

position for this purpose would mean the gross of all net positions across all the clients of a member

including his proprietary position. For this purpose, the position of a client is netted across his

various securities and the positions of all the clients of a Member is grossed. Further, there is no

netting across two different settlements.

b. There is no netting off the positions and setoff against MTM profits across 2 rolling

settlements i.e. T day and T-1 day. However, for computation of MTM profits/losses for the day,

netting or setoff against MTM profits is permitted.

Collection and Release of Margins

All statements pertaining to daily margins viz., VaR, MTM, ELM and Special Margin computed by BSE

on the outstanding positions of the Members are available for downloading by them in their back-

offices at the end of the day.

VaR Margin

The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the

Member at the time of trade.


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Extreme Loss Margin (ELM)

The ELM is collected/ adjusted from the total liquid assets of the Member on a real time basis.

Mark-to-Market Margin (MTM)

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

the security has not been traded on a particular day, the latest available closing price is considered

as the closing price. MTM margins is also recomputed in respect of all the pending settlements on

the basis of closing prices of T day and the difference due to increase/decrease in MTM margins on

account of such recomputation is adjusted in the MTM obligation of the Member for the day. Such

MTM is collected from the Members in the evening on the T day itself, first by adjusting the same

from the available cash and cash equivalent component of the liquid assets and the balance MTM in

form of cash from the Members through their clearing banks on the same day.

Special Margins

The Special Margin as applicable is collected along with MTM from the Members, first, by adjusting

the same from the available liquid assets and the balance Special Margin in form of cash from the

Members through their clearing banks on the same day.

Release of Margins

The above-referred margins are released on completion of pay-in of the settlement

o Fines / Penalty for Margin Default

Cases where there are insufficient balances in bank accounts of the Members at the time of debit of

margin amounts payable in cash on the relevant day, are treated as margin defaults. The norms for

levy of fines/ penalty for delay in clearance of margin obligations w.e.f. May 30, 2005 are as follows :

Violation/s Revised norms (Instances of violations ina F.Y.)

Delay in clearance of margin obligations to the Exchange. 1st to 3rd instance : Rs.5,000/- or 1% of funds obligation,whichever is higher. In addition BOLT Terminal to be de-activated immediately and to remain de-activated tillmargin obligation is cleared.

4th & 5 th instance: Rs.10,000/- or 1.5% of fundsobligation, whichever is higher.

In addition to the above penalty, BOLT Terminal to be de-activated immediately and to remain de-activated foradditional ONE trading day, after clearance of the


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obligation.

6 th & 7 th instance: If financial obligation is Rs.25,000/- penalty of Rs.25,000/-or 2% of funds obligation whichever is higher .

In addition to the above penalty, BOLT Terminal to bedeactivated immediately and to remain de-activated foradditional three trading days after clearance of theobligation irrespective of the amount of obligation.

8 th Instance: If financial obligation is Rs. 50,000/- then penalty of Rs. 50,000/- or 2.5 % of thefunds obligation whichever is higher .

In addition to the above penalty, BOLT Terminal to be de-activated immediately and to remain de-activated foradditional Seven trading days after clearance of theobligation, irrespective of the amount of obligation. Plusthe matter would be referred to DAC.

Exemption from Payment of Margins

The following trades executed on the BOLT are exempted from payment of margins :

a. Institutional business. For this purpose, institutional investors include :

1. Foreign Institutional Investors registered with SEBI.

2. Mutual Funds registered with SEBI.

3. Public Financial Institutions as defined under Section 4A of the Companies Act, 1956.

4. Banks, i.e., a banking company as defined under Section 5(1)(c) of the Banking Regulations

Act, 1949.

5. Insurance companies registered with IRDA.

In cases where early pay-in of securities is made, the outstanding position of the client to the

extent of early pay-in.

Early Pay-in Facility

o The early pay-in of securities done upto 3.00 p.m. on a day are considered for on-

line release of blocked liquid assets on account of margins on that day. The benefits

of early pay-in done after 3.00 p.m. on a day are available on the next trading day.


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o Members are also able to do early pay-in of securities before execution of the trade

on T day to avail benefit of margin exemption.

For availing the benefits of margin exemptions through early pay-in of securities, the members are

required to upload a file containing details in respect of the early pay-in at client level to the Clearing

House(BOISL). The details in the file is matched against the transaction files received from CDSL and

NSDL. Only the matched records are uploaded for Early Pay-In.

Capital Cushion Requirements

SEBI has advised BSE to build an administrative mechanism to encourage members to hold capital

cushions while operating in the Cash and Derivatives Segments. Accordingly, the following

methodology, as advised by SEBI, is being followed by BSE:

o At the end of each calendar month, Members who have exceeded 90% of utilizationof capital during the day for more than 7 days in the current month are identified.

o In the derivatives segment, the utilisation is monitored after considering initial

margins, exposure margins and premium.

o The capital requirement to bring the utilisation to a level of 85% at the time of

violating the trigger point of 90% on each of those occasions is noted for the

Members. The highest of such amounts for the identified members during the

month is called for as additional capital.

o The requirement is communicated to the members on the first day of the

subsequent month.

o The Members are provided a time limit of three working days to provide the amount

of additional capital in the form of Cash, FDRs and Bank Guarantees only.

o The additional capital so collected is retained with the Clearing House for a period of

one calendar month.

o No benefit including exposure, margin etc is available to the Member on the amount

of additional capital so collected.

o In case of non- payment of additional capital within the stipulated time limit a

penalty as applicable for funds shortage is levied on the Member for the period of

default.

o In case a Member is liable to provide additional capital in the subsequent month, theamount of additional capital shall be recomputed and the excess /deficit is refunded

/called for.

Monitoring Business of Brokers

BSE closely monitors the outstanding positions of the main Members on a daily basis. For this

purpose, it has developed various market monitoring reports based on certain pre-set parameters.

These reports are scrutinized by officials of the Surveillance Department to ascertain whether a

Member has built up excessive purchase or sale position compared to his normal level of business.

Further, it is examined whether purchases or sales are concentrated in one or more scrips, whether


30/46

the margin cover is adequate and whether transactions have been entered into on behalf of

institutional clients. Even the quality of scrips, i.e., liquid or illiquid, is looked into in order to assess

the quality of exposure. Based on an analysis of these factors, the margins already paid and the total

capital deposited by the Member with BSE, an advance pay-in is called from the concerned Member.

BSE also scrutinizes the pay-in position of the Members and such Members who have larger funds

pay-in positions are , at the discretion of BSE, asked to make advance pay-in on the T+1 day instead

of on the T+2 day.

BOLT Deactivation

The BOLT TWSs of a Member are deactivated for non-payment / late payment of margins or

settlement dues or on apprehension of financial difficulties or on detection of serious irregularities

or for frequent violations of trading restrictions. Such decisions are taken on a case-to-case basis.

The overall objective in resorting to this ultimate step is to ensure that questionable trading

behavior of a Member does not compromise the safety of the market or jeopardize the integrity of

the market.

Brokers Contingency Fund

BSE operates a Brokers' Contingency Fund, since July 21, 1997 with a view to :

A Member desirous of availing of an advance would be required to give a request letter in writing to

the Clearing & Settlement Department of BSE stating that as and when there is a shortfall in meeting

his funds pay-in obligation, BSE may automatically advance him an amount up to Rs. 10 lakhs to

meet such shortfall.

A Member would be eligible to avail of advance from the Fund up to a maximum of Rs 25 lakhs at

any point of time. The advance would be available only for meeting shortfall in his funds pay-in

obligations in a settlement arising out of delivery based transactions and not for any other

obligations in a settlement.

The advance would be available for a maximum period of 30 days from the date of disbursement. A

Member would be eligible to avail of advance from the Fund up to a maximum of six times in a

financial year. The amounts advanced from the BCF would be at the following interest rates:

o For the first three times in a financial year @12% p.a.

o For the next three times in a financial year @15% p.a.

The advance may be availed of by a Member against the value of his pay-out securities (in

dematerialised form only) after applying a haircut of 30%.

BCF is managed by a Committee comprising of the Managing Director, Chief Operating Officer andthree non-elected directors.


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BSE contributed Rs.9.51 crores to the corpus of this Fund. All active Members are required to make

an initial non-refundable contribution of Rs.2,50,000 to the Fund. The corpus of the fund as on

31/03/08 (unaudited) is Rs. 56 crores.

Members are eligible to get advances from this Fund upto a maximum of Rs.25 lakhs at the rate of

12% per annum.

BCF has ensured that the settlement cycles at BSE are not affected due to the temporary financial

problems faced by its Members, further strengthening the credibility of the stock exchange

settlement system.

Trade Guarantee Fund

SEBI requires BSE to have a system of guaranteeing settlement of trades or set up a Clearing

Corporation to ensure that the market equilibrium is not disturbed in case of payment default by the

members. BSE has accordingly instituted a system to guarantee settlement of bonafide transactions

of Members which form part of the settlement system.

BSE has a Trade Guarantee Fund, in operation since May 12, 1997, with the following objectives :

p. To guarantee settlement of bonafide transactions of BSE Members inter-se which form part

of the Stock Exchange settlement system, so as to ensure timely completion of settlements of

contracts and thereby protect the interest of investors and Members.

TGF is managed by the Defaulters' Committee, which is a Standing Committee constituted by BSE,

the constitution of which is approved by SEBI. The declaration of a member, who is unable to meet

his settlement dues as a defaulter is a pre-condition for invoking the provisions of this Fund.

BSE has contributed an initial sum of Rs.60 crores to the corpus of the Fund. All active members are

required to make an initial contribution of Rs.10,000 in cash to the Fund and also contribute Re. 0.01

for every Rs.1 lakh of gross turnover in all the groups of scrips by way of continuous contribution

which is debited to their settlement account in each settlement.

All active Members are required to maintain a base minimum capital of Rs.10 lakhs each with BSE.

This contribution has also been transferred to the Fund and has been treated as refundable

contribution of the Members. Each Member is also required to provide to the Fund a bankguarantee of Rs.10 lakhs from a scheduled commercial or co-operative bank as an additional

contribution to the Fund.

The present corpus, as on 31/03/2008 ( unaudited ), is Rs 181 crores (cash component excluding

collaterals & additional capital)

TGF has eliminated the age-old counter party risk, so that if a Member is declared a defaulter, other

Members do not suffer.

INVESTORS or CUSTOMERS PROTECTION FUND (IPF)


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Investors' Protection Fund

In accordance with the guidelines issued by the Ministry of Finance, Government of India, the

Exchange has set up an Investor Protection Fund (IPF) on July 10, 1987 to meet the claims ofinvestors against defaulter members.

The Fund is managed by the trustees appointed by the Exchange.

The members at present contribute to this Fund Re.0.15 per Rs.1 lakh of gross turnover, which is

debited to their general charges account. The Stock Exchange contributes on a quarterly basis 2.5%

of the listing fees collected by it. Also the entire interest earned by the Exchange on 1% securitydeposit kept with it by the companies making public/rights issues is credited to the Fund. As per the

SEBI directive, auction proceeds in certain cases, where price manipulation / rigging was suspected,

have been impounded and transferred to the Fund. Also, the surplus lying in the account of the

defaulters after meeting their liabilities on the Exchange is released to them after transferring 5% of

the surplus amount to this Fund.

As at the end of June 30, 2002, the corpus of the Fund was Rs 157.03 crores.

The maximum amount presently payable to an investor from this Fund in the event of default by a

member is Rs.10.00 lakhs. This has been progressively raised by the Exchange from Rs.5,000/- in

1988 to the present level and is the highest among the Stock Exchanges in the country.

The arbitration award obtained by investors against defaulters is scrutinized by the Defaulters

Committee, a Standing Committee constituted by the Exchange, to ascertain their genuineness, etc.

Once the Defaulter Committee is satisfied about genuineness of the claim, it recommends to the

Trustees of the Fund for release of the award amount or Rs.10.00 lacs, whichever is lower. After the

approval of the Trustees of the Fund, the amount is disbursed to the clients of the defaulters from

the Investor Protection Fund.

Trade Guarantee Fund - G -Sec Segment

In 2003, BSE had set up a distinct Trade Guarantee Fund known as GSEC Trade Guarantee Fund for

trading in the Central Government Securities and such fund was created with an initial contribution

of Rs. 5 crores by transferring the said amout from the free reserves of BSE


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The present corpus as on 31/03/08 (unaudited) is Rs.7 crores.

q. To inculcate confidence in the secondary market traders including the global investors to

attract larger participation.

r. To protect the interests of the investors and to promote the development and regulation of

the secondary market.

make temporary refundable advance(s) to the Members facing temporary financial mis-

match as a result of which they may not be in a position to meet their financial obligations to BSE in

time;

protect the interest of the investors dealing through the BSE Members by ensuring timelycompletion of settlement

inculcate confidence in investors regarding safety of their bonafide transactions

DAY ACTIVITY TIME

T + 3 Patawat Arbitration session : Arbitrationawards to be obtained from officials ofthe Bad Delivery Cell

10:30 a.m. to 11:30 a.m.

Securities under objection to besubmitted in the Clearing House.

11:00 a.m. to 12:00noon

The delivering members to collect suchsecurities under objection from theclearing house

2:00 p.m. to 3:00 p.m.

Arbitration awards for invalid objectionto be obtained from members of theArbitration Review Committee/officials ofthe Bad Delivery Cell.

5:00 p.m. to 5:30 p.m.

T + 4 Members and institution to submitrectified securities, confirmation formsand invalid objections in the clearinghouse.

1:00 p.m. to 2:00 p.m.

Rectified securities/invalid objections will

be delivered to the receiving members

3:00 p.m. to 4:00 p.m.

T + 5 Arbitration Awards for invalidrectification to be obtained from officialsof the Bad Delivery Cell

11:30 a.m. to 12:30 p.m.

Securities to be lodged with the clearinghouse unto

1:00 p.m

The transactions pertaining to un-rectified and invalid rectification of securities are directly closed-

out by BSE as per the formula.

The shares in physical form returned under objection to the Clearing House as explained earlier arerequired to be accompanied by an arbitration award (Chukada) except in certain cases where the


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receiving Members are permitted to submit securities to the Clearing House without "Chukada" or

arbitration award in the following cases:

Gross exposure Limit/Margin

As per the latest rules of SEBI, a trading member having Rs 1 crore exposure in

Group 1 securities (highly liquid securities) will have adjusted gross exposure

of Rs 1 crore. For exposure of Rs 1 crore in Group 2 (securities with medium

liquidity) and Group 3 (illiquid scrips), the adjusted gross exposure will be Rs

3 crore and Rs 5 crore respectively.

Hence, though the outstanding position is Rs 3 crore, the adjusted gross

exposure for the member will be considered as Rs 9 crore.

Stock exchanges use margin as a tool to control the activities of the broker.

How much business a broker can do depends on the deposit the broker has with the

stock exchange concerned. In a volatile situation, when the exchange wants to

cut down the exposure of the broker, the exchange uses margin as a tool to do

so.

Gross Exposure Limits

Members are also subject to gross exposure limits. Gross exposure for a member,

across all the securities in rolling settlements, is computed as the absolute

(buy value - sell value), i.e. ignoring +ve and -ve signs, across all open

settlements.Open settlements would be all those settlements for which trading

has commencedand for which settlement pay in is not yet completed. The total

gross exposure for a member on any given day would be the sum total of the gross

exposure computed across all the securities in which the member has an open

position

In case of securities that are traded in the Rolling settlement (Type 'N'and

security series 'EQ'), the GE multiple for each security are as under:

Group I 1 time

Group II 3 times

Group III 5 times


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All new securities to be traded on the Exchange shall be subject to exposure

multiple of 2 times. It is clarified that while computing the gross exposure at

any time for a particular trading day, for the purpose of the above limits,

members are required to add the net outstanding positions of the previous

settlement period to the cumulative net outstanding positions as of that

particular trading day until the securities pay in day for the previous

settlement period. Members exceeding the gross exposure limit are not permitted

to trade with immediate effect and are not permittedto do so until the

cumulative gross exposure is reduced to below the gross exposure limits (as

defined above or any such lower limits as applicable to the members) or they

increase their limit by providing additional base capital.Members who desire to

reduce their gross exposure may submit their order entry requirements as per the

prescribed format and if members desire toincrease their limits additional

deposits by way of bank guarantee or Fixed Deposit Receipt (FDR) have to be

submitted to NSCCL. Additional deposits by way of securities in electronic form(demat securities) may be deposited as per procedures.The additional deposits of

the member are used first for adjustment against grossexposure of the member.

After such adjustments, the surplus additional deposits, if any, excluding

deposits in the form of securities is utilized for meeting the margin

requirements


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Risk Management

Nature of Risks

Reduction and Control of Risks

Know Your Client Scheme

Database of lost , Stolen , Misplaced Securities

Client Caution Database

Verification of shares at members office

Inspection

Nature of Risks:

The Exchange has been exposed to a large number of risks, which have been inherently borne by the

member brokers for all times. Since the introduction of the screen based trading the nature of risks

to which the members of the Exchange are exposed to has undergone radical transformation. At the

same time the inherent risk involved with the trading of paper based securities still remains. Though

the process of dematerialisation has already begun, till such that it is made compulsory in all scrips,

the risk of trading in fake/forged shares and instances of loss of shares etc. will continue to exist. The

safe custody of these shares in physical form in the Exchange as well as in the member brokers

offices is of prime importance.

The Risks can be classified as under:


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1. Risks associated with Paper Based Trading

o Lost/misplaced securities

o damage to securities

o loss of securities in transit

2. Client Risk

o Client default

o Client absconding

o Fake/ forged/stolen securities introduced by the clients

Reduction and Control of Risks:

As a measure of the pro-active risk control several measures have been initiated by the Exchange toreduce the risks to which the Exchange and the member brokers are exposed. In this regard the

Exchange has initiated the following measures:

1. Know Your Client Scheme :

Under the procedure the member brokers of the Exchange are compulsory required to obtain

detailed information of clients prior to commencement of any transactions for new clients. A similarprocedure is also to be followed for existing clients. This information is to be made available to the

Exchange authorities whenever called for. In case the member brokers fails to furnish the same it is

viewed seriously.

2. Database of lost , Stolen , Misplaced Securities :

The Exchange maintains a database on all the shares that have been reported as lost, stolen,

duplicate etc. by the Companies / registrars. The information available through the database is time

relevant thus the database is modified on a regular basis and is downloaded by the members

through BOLT on a weekly basis. This database is also provided to the Clearing House. The member

brokers can thus reduce the instances of delivery of shares that have been reported by the Company

as bad delivery by checking all the deliveries in their office with the database provided. The

Exchange has designed and developed a software module for the above for the benefit of the

members.

The Clearing House also uses the database. At the time of pay-in the members of the Exchange are

required to submit the details of the shares being deposited in the pay-in in a softcopy in a

prescribed format.. These details are checked against the database and a report is generated in case

a match is found. Such shares are then reported as bad delivery in the Exchange. Further follow-up is

done with the delivering broker and they are directed to lodge a police complaint against the client

introducing the stolen shares.


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3. Client Caution Database :

The Risk Management department in conjunction with the Bad Delivery Cell of the Exchange, the

Exchange has designed and developed a client database. All member brokers whose clients / sub-

brokers have introduced fake / forged shares are required to lodge a FIR / Police complaint against

their clients and also report the same to the Exchange. The information of such clients is called for in

a prescribed format. As per the scheme the members have to collect detailed information about the

clients. These details are incorporated in the database, which is downloaded to the members, as a

precautionary measure. The member brokers at the time of admitting new clients can refer to the

client caution database for further verification.

4. Verification of shares at members office :

The Risk Management Committee has outlined a process for minimising the risks arising out of Fake/

forged /stolen shares introduced by the clients of the member brokers.

As per the procedure outlined issued by the Exchange, in case the transaction in a script with one

particular client in a settlement exceeds Rs. 10 lakhs then the member brokers are required to send

the photocopies of the transfer - deeds and the share certificates to the Company / Registrar for

verification of the material particulars. The members can select a random sample for the same from

the lot. A similar procedure should also be followed in case the shares worth more than Rs. 10 lakhs

are received from the Clearing House during pay-out in one scrip.

The basic idea behind the introduction of this procedure is to prevent Fake/ forged/stolen shares

from being introduced in the market. The Exchange issued a notice outlining the procedure to be

followed. The above procedure is an important Risk Management Tool especially where there exists

a large volume of deliveries. The Risk Management Department acts as a facilitator in this regard and

has written to all "A" group and B1 group companies in this regard seeking their co-operation.

5. Inspection :

The department is carrying out inspection of the member brokers records as regards compliance of

the risk management procedures.

Integrated Comprehensive Insurance Policy for Members

To reduce the systematic risk, Securities & Exchange Board of India ( SEBI) vide its circular ref. No

SMD/SED/RCG/270/96 dated January 19th, 1996, had directed all stock exchanges to ensure that all

active Members are properly insured. Insurance companies in consultation with BSE have offered an

insurance policy which covers losses on account of trading as well as back office losses to the

Members. The minimum sum insured is Rs.5 lakhs per Member

Presently, all active Members obtain the said policy directly from the insurance companies and then

inform BSE about the same.


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Property Insurance Policies

The assets at BSE are fully covered through fire, burglary theft ( including terrorism) insurance

policies.

Surveillance

BSE is one of the few stock exchanges in the world, which has obtained the ISO certification for its

surveillance function. The main objective of the surveillance function is to promote market integrity

in two ways,

By monitoring price and volume movements (volatility) as well as by detecting potential

market abuses (fictitious/ artificial transactions, circular trading, false or misleading impressions,

insider trading, etc) at a nascent stage, with a view to minimizing the ability of the market

participants to influence the price of any scrip in the absence of any meaningful information

By taking timely actions to manage default risk.

The surveillance activities at BSE are allocated to three Cells:

Price Monitoring: is mainly related to the price movement/ abnormal fluctuation in prices or

volumes of any scrip

Investigations: conducting snap investigations/examinations/detailed investigations in scrips

where manipulation /aberration is suspected.

Position Monitoring: relates mainly to abnormal positions of Members in order to manage

the default risk

Price Monitoring Cell


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The function of this Cell is to detect potential market abuses at a nascent stage to reduce the ability

of the market participants to unduly influence the price of the scrips traded at BSE by taking

surveillance actions like reduction of circuit filters, imposition of special margin, transferring scrips

on a trade-to-trade settlement basis, suspension of scrips/ members, etc.

These pro-active measures are taken based on the analysis/ processing of alerts generated based on

various parameters and other inputs like news, company results, etc. The broad parameters

considered for generation and analysis of alerts are price movement, top 'n' turnover, scrips traded

infrequently, scrips hitting new high/ low, scrips picked up for rumour verification, etc.

The scrips picked up based on the preliminary analysis/ enquiries are forwarded to the Investigation

cell for further examination/ investigation.

The detail rationale of the surveillance actions taken by BSE from time to time are as follows :

o Special Margins

o Special margins are imposed on such scrips which have witnessed an abnormal price/

volume movement. Special margin is imposed by BSE @ 25% or 50% or 75% as the case may

be, on the client wise net outstanding purchase or sale position (or on both side).

o Reduction of Circuit Filters

o The circuit filters are reduced in case of illiquid scrips or as a price containment measures.

The circuit filters are reduced to 10 % or 5 % or 2 % as the case may be, based on the criteria

decided by the Surveillance Department. No circuit filters are applicable on scrips on which

derivative products are available and scrips which are liquid and included in indices on which

derivative products are available. However, BSE imposes dummy circuit filter on these scrips

to avoid punching errors, if any.o Circuit Filter of 20 % is applicable on other scrips which are not included in the above-

mentioned category.

o Trade-to-Trade

o If a scrip is shifted to the Trade-to-Trade settlement basis, selling/ buying of shares in that

scrip results into giving/ taking delivery of shares at the gross level and no intra day netting

off/ square off facility is permitted. The scrips which form part of the 'Z group' are

compulsorily settled on a trade-to-trade basis. In addition, the Surveillance Department

transfers various scrips from time to time to the trade-to-trade settlement basis (T&TS

group) based on the criteria decided jointly by the stock exchanges and SEBI.

o Suspension of a scrip

o A scrip is suspended for trading by the Surveillance Department in exceptional cases,

pending investigation or if the same scrip has been suspended by any other stock exchange

as a surveillance action.

Rumou

Back Office Operations Final

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