STOCK EXCHANGE FUNCTIONING & BACK OFFICE MANAGEMENT

1. 1

2. WHAT IS A STOCK EXCHANGE?
• Stock Exchange (also called Stock Market or Share Market) is one
important constituent of capital market.
• Stock Exchange is an organized market for the purchase and sale of
industrial and financial security. It is convenient place where
trading in securities is conducted in systematic manner i.e. as per
certain rules and regulations.
• It performs various functions and offers useful services to investors
and borrowing companies. It is an investment intermediary and
facilitates economic and industrial development of a country.
2

3. THE FIRST STOCK EXCHANGE
The first stock exchange was in the Netherlands when the Dutch
East India Company issued the first shares on the Amsterdam
Stock Exchange. Slowly, stock exchanges opened in London and in
New York.
Amsterdam Stock Exchange is the oldest stock exchange in the
world. While BSE is the oldest in India
3

4. INDIAN SECURITIES MARKET
• A stock market or equity market is a public market for the
trading of company stock and derivatives at an agreed price;
these are securities listed on a stock exchange
• Stock exchange allows businesses to be publicly traded, or
raise additional financial capital for expansion by selling
shares of ownership of the company in a public market
• It mobilizes the savings from the household sector to the
investment in the corporate sector
• Stock market is known as the barometer of the economy
4

5. TILL RECENT PAST
• Floor trading took place in all stock exchanges
• Open out cry system during official trading hours
• Trading post were assigned for different securities to buy and
sell; system needed a face to face contact, which reduced
trading volume
• Deals were not so transparent, favoured brokers than investors
• Setting of NSE resulted in screen based trading
5

6. TYPES OF MARKET
1. Normal Market :
Order Traded in regular lot Size
For demat shares, lot size is 1 share
2. Odd Lot Market :
Used for limited physical Market
Order not traded in regular lot Size but both
price & quantity should tally with each other.
6

7. 3. Spot Market :
Different settlement periods depends on normal
orders
Sell & Purchases takes place on same date.
4. Auction Market :
Initiated by exchange on behalf of members
for settlement related reasons
3 participants
7

8. BIG STOCK MARKETS
 NYSE ( New York Stock Exchange)
 NASDAQ-America
 Dow Jones
 S&P‘ 500
 Tokyo Stock Exchange
 London Stock Exchange
 Bombay Stock Exchange, India
 National Stock Exchange, India
8

9. STOCK EXCHANGES IN INDIA
There are 22 stock exchanges in India. But, two of them are
biggest.
NSE (National stock exchange) - is the 9th largest stock
exchange in the world by market capitalization and largest in
India by daily turnover and number of trades, for both
equities and derivative trading.
BSE (Bombay stock exchange) - is the oldest stock exchange
in Asia with a rich heritage of over 137 years of existence.
9

10. 10

11. BOMBAY STOCK EXCHANGE
• Location: Mumbai
• Index: Sensex (SENSitve indEX)
• Consist of group of 30 Stock
• Members: 852
• Date of Launch: 03 January 1986
• Base period:1978-79
• Base Index Value:100
• Sectoral indices
• Timing: 09.15 AM – 03.30 PM
• Listed Co. : over 6000
11

12. NATIONAL STOCK
EXCHANGE
• Location: Mumbai
• Index: Nifty (National Stock Exchange Fifty)
• Consist of group of 50 Stocks
• Date of Launch: April 1994
• Base period: 1993-94
• Base index value: 1000
• Members 726
12

13. IMPORTANT TERMS IN STOCK
MARKET AND IN STOCK TRADING
Open - The stock price in beginning of Day (i.e. in
morning).
High - The stock price reached at the highest level in
a day.
Low - The stock price reached the lowest level in a
day.
13

14. IMPORTANT TERMS IN STOCK MARKET AND
IN STOCK TRADING
Close - The stock price at which it remains after the end
of market timings or the final price of the stock when
the market closes for a day.
Volume - Volume is nothing but quantity.
Bid - The Buying price is called as Bid price.
Offer - The selling price is called offer price.
14

15. INVESTMENT IN SHORT TERM, MID
TERM AND LONG TERM TRADING
Short Term Trading -
Stock trading done from one week to couple of
months is called short term.
Mid term Trading -
Stock trading done from one month to couple of
months, say six to eight months is called mid term
trading.
15

16. INVESTMENT IN SHORT TERM, MID
TERM AND LONG TERM TRADING
Long term trading -
Stock trading done from couple of months to
couple of years is called long term trading.
Companies whose fundamentals are good and have
good future plans then the stocks of these
companies are used for long term trading.
Generally traders having good capital go for long
term trading.
16

17. STOCK MARKET CONDITIONS
There are two ways to describe the general conditions of
the stock market:
1)BULL MARKET
2)BEAR MARKET
Bull Market:
A Bull Market indicates the constant upward movement of
the stock market. A particular stock that seems to be
increasing in value is described to be bullish.
17

18. STOCK MARKET CONDITIONS
BEAR MARKET:
A bear market indicates the continuous downward
movement of the stock market. Stock that seems to be
decreasing in value is described to be bearish.
18

19. 1. Demand and supply
2. Bank rate
3. Speculative pressure
4. Actions of underwriters and other financial institutions
CAUSES OF PRICE FLUCTUATION
19

20. 5. Financial position of the company
6. Trade cycle
7. Political factors
8. Sympathetic fluctuations
9. Other factors:
A. Weather conditions – A sudden turn in weather conditions. Eg: excess rainfall
B. Oil prices in the international market
20

21. HOW SENSEX INDEX IS CALCULATED
The formula for calculating the Sensex =
(sum of Free Float Market capitalization of 30 benchmark stocks)*
Index Factor
Where;
Index Factor = 100/market cap value in 1978-79.
21

22. EXAMPLE ON SENSEX INDEX
CALCULATION
Assume Sensex has only 2 stocks namely SBI and
RELIANCE. Total shares in SBI are 500 out of 200 are
held by government and only 300 are available for
public trading. Reliance has 1000 shares out of which
500 are held by promoters and 500 are available for
trading. Assume price of SBI stock is Rs. 100 &
Reliance is RS. 200.
22

23. EXAMPLE ON SENSEX
CALCULATION
Solution –
Then Free Float Cap of these two company
= (300*100+500*200)
= 30,000+1,00,000
= 1,30,000
Assume market cap during the year 1978-79 was 25000
Then SENSEX = 1,30,000*100/25000
= 520
23

24. HOW NIFTY INDEX IS CALCULATED
The National Stock Exchange (NSE) is associated with
Nifty
The calculation of Nifty is same as we calculated
SENSEX. But with two key differences.
1. Base year is 1995 and base value is 1000
2. Nifty is calculation based on 50 stocks.
(everything else remaining the same in nifty index
calculation as well.)
24

25. PRODUCTS AND PARTICIPANTS
Products
Equities
Debt
securities
Derivatives
Mutual
Funds
25

26. PRODUCTS AND PARTICIPANTS
Participants
Participants
Investors Issuers Intermediaries
26

27. FUNCTIONS OF STOCK EXCHANGE
Raising Capital for Business
Mobilizing Savings for Investment
27

28. FUNCTIONS OF STOCK EXCHANGE
Facilitate Company Growth & Corporate Governance
Provides Safety and Security in Dealings
28

29. FUNCTIONS OF STOCK EXCHANGE
Pricing of Securities
Creates Investment Opportunities for Small Investors
29

30. FUNCTIONS OF STOCK EXCHANGE
Liquidity
Barometer of the Economy
30

31. TRANSACTION CYCLE
31

32. DAILY FUNCTIONING OF EQUITY
MARKET
32

33. BLOCK DEAL
• A single trade having quantity greater than or equal to 500,000 or value
greater than or equal ₹ 5 crores, executed through Block deal window
• Block Deal Orders are executed only during the first 35 minutes of the
continuous trading session i.e. from 9:15 am to 9:50 am
• Block Deal is allowed only in Cash segment
• Block deal order for scrip should be within range of (+/-) 1% from the last
traded price or the previous closing price
• For block deal order to get traded, the quantity and rate should be exactly
the same as opposite-side block deal order
33

34. MARKET CLOSE & POST CLOSE
Marketclose • Time frame when no
trading takes place
• Trading members
are informed
• Inquiries & Trade
cancellations
permitted
Postclose
• Post close is a 20
minute window from
3:40 pm – 4:00 pm
• Market price orders
• Securities traded in
normal market are
permitted
34

35. KEY TERMS RELATING TO ‘STOCK
MARKET’
35

36. CAPITAL STRUCTURE
• Capital structure means the proportion of debt and equity used
for financing the operations of a business or an enterprises.
The capital structure should be such which increases the value of
equity shares or maximises the wealth of share holder.
36

37. • In finance, to corner the market is to get sufficient control of
a particular stock, commodity, or other asset to allow the
price to be manipulated.
Corner the market to have the greatest market share in a
particular industry without having a monopoly. They may
charge higher prices for their products without fear of losing
too much business.
CORNERING
37

38. SPECULATION
• Speculation is the practice of engaging in risky financial
transactions in an attempt to profit from short or medium
term fluctuations in the market value of a tradable good.
• Speculation can in principle involve any tradable good or
financial instrument.
38

39. Speculators:
• Many speculators pay little attention to the fundamental
value of a security and instead focus purely on price
movements.
Four kinds of speculators operate in the Indian Stock
Exchange. They are known as :
 Bull
 Bear
 Stag and
 Lame duck.
39

40.  Bull:
A Bull is an operator who is hopeful of price rise in the near
future. In anticipation of price rise he makes purchases of
shares and other securities with the intention of selling them
at higher prices in future.
He being a speculator has no intention of taking delivery of
securities but deals only in difference of prices.
40

41. Bear:
A bear does not have securities at present but sells
them at higher prices in anticipation that he will
supply them business purchasing at lower prices in
the future.
41

42. Stag:
A stag is that type of speculator who treads his path
very carefully. He applies for shares in new
companies and expects to sell them at a premium if
he gets an allotment. He selects those companies
whose shares are most in demand and are likely to
carry a premium. He sells the shares before being
called to pay the allotment money.
42

43. Lame Duck:
A Lame Duck is nothing but a stressed bear. When a
bear finds it difficult to complete his promise he is
labeled as a lame duck.
43

44. PREREQUISITES FOR TRADING
• We need to have DP(DEPOSITORY PARTICIPANT) account.
• We need to have a Trading account.
• And of course money 
44

45. How Trading Happens?
Stock Exchange
Ex : NSE,BSE
People using
terminal provided
by their brokers
45

46. KINDS OF TRADING
• Intra-day Trading:
• Buying and Selling on the same day
• Brokerage will be different for intra-day and delivery based
trading, intra-day being lesser
• Delivery based Trading:
• Buying and Selling are on different days
• Brokerage will be higher than intra-day
• Their will be minimum delivery charges
46

47. HOW DOES IT HAPPEN
• Ex :
You buy the share on Monday.
It will be delivered to you on Wednesday’s
settlement period (T + 2) normally.
47

48. WHAT IS SHORT SELLING?
• Selling something which you don’t have.
Ex: Lets consider a company RIL.
Its priced at Rs 2,500/- before opening. You know it’s going to
fall that day because of some reason. But you don’t have any
shares with you of RIL. But still you can sell the shares, this is
called as short selling.
48

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

50. Assume you sold 10 RIL shares in morning at Rs 2,500/-. By evening as you had
thought, it had fallen down to Rs 2,400/-. Now you buy back those 10 shares
what you had sold. So the difference in amount, 2,500 – 2,400 = 100
100 * 10 = 1000, is yours.
This process of buying back is called short covering.
50

51. WHAT IF YOU DON’T SHORT COVER?
• You will become a defaulter.
• Lets understand this with an Example.
• Assume you short sold on Monday, as you haven’t short covered
it, you need to deliver it on Wednesday(T + 2). But you don’t
have the shares to deliver. So NSE or BSE will buy the shares on
behalf of you in auction market, and deliver it to the buyer in (T
+ 3 days). In auction market max price is 10% higher than in
normal market.
51

52. EXAMPLE QUESTION
Assume Ram bought on Monday 100 shares of
RIL at Rs 2,500/- , on response to some good
news it rose high on Tuesday to say Rs 2,600/-.
So Ram is in a whooping profit of (100 * 100)
Rs 10,000/- in a day.
Ram plans to sell it.
Will he get that profit for sure?
52

53. EXAMPLE OF SHORT SELLING
Monday : Ram bought stocks
Tuesday : Ram sold stocks
Wednesday : Stocks wont get delivered to him, as they were short sold.
Thursday : Ram needs to deliver the stocks, as he has sold on Tuesday, but he
don’t have them now, as they were short sold, so he becomes a defaulter.
Friday : Ram gets the delivery of short sold stocks
53

54. DAY PRICE
Monday 2500
Tuesday 2600
Wednesday 2620
Thursday 2670
Friday 2550
54

55. Ram actually ended up in loss!!!
55

56. TRADING MEMBERS & CLEARING MEMBERS
• According to SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, a
stockbroker is member of a stock exchange and is required to hold a certificate
of registration from SEBI in order to buy, sell or deal in securities
• Transactions in any stock exchange are executed by member brokers who deal
with investor
• An investor can buy or sell securities only through one of the members of the
exchange
• Trading Membership entitles the members only to trade on his own account as
well as on account of his clients. These Members do not have any right to clear
or settle such trades
• Trading-cum-Clearing Membership entitles the members to trade and clear,
both for themselves and/ or on behalf of their clients
56

57. BROKER
Who can become a broker in India?
• An individual, a firm or a corporate can become a trading member(broker) of
a stock exchange
• Minimum age shall be 21 for individuals and partners/directors of
firms/corporates
• Individual/Partners/Directors must be at least graduates
• Should have a minimum of 2 years experience in an activity related to dealing
in securities or as portfolio manager or as investment consultant or as a
merchant banker or in financial services or treasury, broker, sub broker,
dealer, authorized agent or authorized clerk or authorized representative of a
recognized stock exchange
57

58. AUTHORIZED PERSONS & SUB-BROKERS
• An authorized person introduces clients to the trading member and
receives remuneration/ commission/ compensation from the trading
member and not from the clients
• The clients introduced by the authorized person are required to deliver
securities and make payments directly in the trade name of the trading
member (as appearing on the SEBI registration certificate)
• Similarly, the trading member should deliver securities and make
payments directly in the name of the clients
• A sub-broker is allowed to be associated with only one Trading
Member of the Exchange; Provide assistance to the stock broker
58

59. BROKERAGE
A commission charged by a broker to his investors
• Let's say you bought & sold shares worth Rs 20,000
• Brokerage @ 0.30% on Rs 20,000 = Rs 60
• Transaction charges @ 0.0035% on Rs. 20,000 = Rs 0.7
• Turnover Chages @ 0.0001% on Rs. 20,000= Rs 0.02
• Service tax @ 10.2% on Rs 60 = Rs 6.12
• Stamp Duty @ 0.01% on Rs. 20,000= Rs. 2
• STT @ 0.1% on Rs 20,000 = Rs 20
• Total payments made by you on Rs 20,000 = Rs 88.84
59

60. BROKER-CLIENTS RELATIONS
Client Registration Documents
Unique Client Code (UCC)
Margins from the Clients
Execution of Orders
60

61. TRADING MEMBER’S RESPONSIBILITIES FOR
TRADES
Contract note
Delivery of the securities
Maximum brokerage chargeable
Maintain separate bank accounts
61

62. CONTRACT NOTE
62

63. UNIFORM DOCUMENTATION FOR OPENING
TRADING ACCOUNT
• SEBI has devised uniform documentation to be followed by all the stock
brokers/ trading members for opening trading account for clients
1: Account Opening Kit – Index of Documents
2: KYC Application Form – For Individuals and Non-Individuals
3: Trading Account Related Details
4: Rights and Obligations of Stock-brokers, Sub-brokers &
Clients
5: Risk Disclosure Document for Capital Market and Derivatives
Segments
6: Guidance Note - Do’s and Don’ts for Trading on the
Exchange(s) for Investors
63

64. DEPARTMENTS IN BACK OFFICE
1 • Client Registration Department (CRD)
2 • Delivery and Accounts Department
3 • Compliance Department
4 • Surveillance Department
6 • SB Department (sub broker)
7 • Department of Investors Services
64

65. SCREEN BASED TRADING
• Modern, fully computerised trading system
PUNCH THE ORDER MATCH THE ORDER
TRANSACTION
COMPLETED
65

66. SCREEN BASED TRADING
• Under this system a trading member can punch into the computer, the
number of securities and the prices at which he would like to transact.
The transaction is executed as soon as the system is able to find a
matching sell or buy order from a counter party.
• An active order tries to find a match on the other side of the books. If it
finds a match, a trade is generated. If it does not find a match, the order
becomes a passive order and goes and sits in the order book, as per the
price/time priority
• Price priority means that if two orders are entered into the system, the
order having the best price gets the higher priority.
• Time priority means if two orders having the same price is entered, the
order that is entered first gets the higher priority.
66

67. ADVANTAGES OF SBTS
• Improves operational efficiency
• Increased the informational efficiency of markets
• Executes trades instantly
• Helps traders to simultaneously analyze options and execute
orders
• Manage portfolios efficiently
67

68. MARGIN TRADING
• Margin trading is a facility for investors to trade in securities with
borrowed funds provided by the broker or other financers
• The margin needs to be maintained at all times. If the market falls, then
the broker will call for additional funds from the investor. This is called a
‘margin call’.
• Corporate brokers with net worth of at least ₹ 3 crore are eligible for
providing Margin trading facility to their clients subject to their entering
into an agreement.
• The broker can provide the margin funds through own resources or
borrowing from banks or NBFCs regulated by SEBI. Borrowing from other
sources is not permitted
68

69. CLEARING AND SETTLEMENT
69

70. AGENCIES INVOLVED IN CLEARING AND
SETTLEMENT PROCESS
• Clearing Corporation
• Clearing Member
• Custodian
• Clearing Bank
• Depositories
70

71. NSCCL (NATIONAL SECURITIES CLEARING
CORPORATION LIMITED)
• It clears all trades
• Determines obligations of members
• Arranges for pay-in of funds/securities
• Receives funds/securities
• Processes for shortages in funds/securities
• Arranges for pay-out of funds/securities to members
• Guarantees settlement
• Collects and maintains margins/collateral/base capital/other
funds.
71

72. NSCCL (NATIONAL SECURITIES CLEARING
CORPORATION LIMITED)
NSCCL was set up with the following objectives:
1. To bring and sustain confidence in clearing and settlement of
securities
2. To promote and maintain, short and consistent settlement cycles
3. To provide counter-party risk guarantee
4. To operate a tight risk containment system
72

73. CLEARING MEMBER
• A Clearing Member (CM) of NSCCL has the responsibility of clearing and
settlement of all deals executed by Trading Members (TM) on NSE, who
clear and settle such deals through them.
• Functions:
1. Clearing
2. Settlement
3. Risk Management
73

74. TYPES OF CLEARING MEMBERS
• Trading Member Clearing Member (TM-CM)
A Clearing Member who is also a TM. Such CMs may clear and settle their
own proprietary trades, their clients' trades as well as trades of other
TM's & Custodial Participants
• Professional Clearing Member (PCM)
A CM who is not a TM. Typically banks or custodians could become a PCM
and clear and settle for TM's as well as of the Custodial Participants
• Self Clearing Member (SCM)
A Clearing Member who is also a TM. Such CMs may clear and settle only
their own proprietary trades and their clients' trades but cannot clear
and settle trades of other TM's.
74

75. CUSTODIAN
• A custodian is a person who holds for safekeeping the documentary evidence of the title
to property belonging like share certificates, etc.
• The title to the custodian’s property remains vested with the original holder, or in their
nominee(s), or custodian trustee.
• In NSCCL, custodian is a clearing member but not a trading member.
• He settles trades assigned to him by trading members.
• The custodian is required to confirm whether it is going to settle a particular trade or not.
• If it is confirmed, the NSCCL assigns that obligation to that custodian and the custodian is
required to settle it on the settlement day.
• If the custodian rejects the trade, the obligation is assigned back to the trading/clearing
member.
75

76. CUSTODIANS REGISTERED WITH SEBI
• Axis Bank Ltd
• ILRTL
• BNP Paribas
• J P Morgan Chase
• Citibank
• HSBC Ltd
• DBS Bank Ltd
• ICICI Ltd
• Deutsche Bank A.G.
• ILFS Ltd
• Edelweiss Custodial Services Limited
• SHRTL
• Kotak Mahindra Bank
• HDFC Bank Ltd
• Orbis Financial Corporation Ltd
• Standard Chartered Bank
• State Bank of India
• Stock Holding Corporation of India
Ltd.
• SBI Custodial Services Pvt. Ltd
76

77. CLEARING BANK
• A key link between the clearing members and NSCCL for funds settlement.
• Every clearing member is required to open a dedicated settlement account
with one of the clearing banks.
• Based on his obligation as determined through clearing, the clearing member
makes funds available in the clearing account for the pay-in and receives funds
in case of a pay-out.
77

78. CLEARING BANKS
• Canara Bank
• Union Bank of India
• HDFC Bank
• State Bank of India
• HSBC Bank
• IndusInd Bank
• Axis Bank
• ICICI Bank
• Citi Bank
• IDBI Bank
• Kotak Mahindra Bank
•
• Bank of India
• Standard Chartered Bank
78

79. DEPOSITORIES
• A depository holds the securities in a dematerialized form for the investors
in their beneficiary accounts.
• Each clearing member is required to maintain a clearing pool account with
the depositories. They are required to make available the required securities
in the designated account on settlement day.
• The depository runs an electronic file to transfer the securities from the
accounts of the custodians to that of the NSCCL (and vice versa) as per the
schedule of allocation of the securities.
• The two depositories in India are the National Securities Depository Ltd.
(NSDL) and the Central Depository Services (India) Ltd. (CDSL).
79

80. SETTLEMENT
• Settlement takes place once clearing process is performed
• The settlement agency receives cash from buyers and securities from sellers
and, at the end of the process, gives the securities to the buyer and the cash
to the seller.
80

81. SETTLEMENT PERIOD
• The period of time between the settlement date and the transaction date
that is allotted to the parties of a transaction to satisfy the transaction's
obligations.
• The buyer must make payment within the settlement period, while the
seller must deliver the purchased security within this period.
• Depending on the type of security traded, the exact length of the
settlement period will differ.
81

82. • The settlement period is often quoted as T+1, T+2 or T+3.
• For stocks, the settlement period is three days (T+3) after the transaction.
• For certificates of deposit and commercial paper it is (T+1), while for forex
transactions it is (T+2)
82

83. TRANSACTION CYCLE
Decision to
Trade
Placing
Order
Trade
Execution
Clearing of
Trades
Settlement
of Trade
Funds/
Securities
83

84. SETTLEMENT PROCESS
• National Securities Clearing Corporation Ltd. (NSCCL) determines the
funds/securities obligations of the trading members and ensures that the
trading members meet their objectives
• Core Functions involved in this process
Trade Recording
Trade Confirmation
Determination of obligation
Pay in of Funds/Securities
Pay out of Funds/Securities
Risk Management
84

85. SETTLEMENT PROCESS
• Two critical activities in the settlement process are:
– Pay-in of Funds and Securities
– Pay-out of Funds and Securities
85

86. STEPS FOLLOWED IN SETTLEMENT OF
TRADE
Step 1: Determination of obligations
Step 2: Pay-in of funds and securities
Step 3: Pay-out of funds and
securities
Step 4: Risk management
86

87. SETTLEMENT CYCLE
DAY TIMINGS JOB PERFORMED
T(TRADE DAY) 9.55 A.M TO 3.30 P.M BUY/SELL
SECURITIES
T+1 BY 11.00 A.M CONFIRMATION OF
ALL TRADES
BY 1.30 P.M PROCESSING AND
DOWNLOADING OF
FILES BY
BROKERS/CUSTODIA
NS
T+2 BY 11.00 A.M PAY IN OF
SECURITIES/FUNDS
BY 1.30 P.M PAY-OUT OF
SECURITIES/FUNDS
87

88. SETTLEMNT PROCESS OF NSE
1.Trade Details from Exchange to NSCCL
2.NSCCL notifies the consummated trade
details to CMs/custodians who affirm back.
Based on the affirmation, NSCCL applies
multilateral netting and determines obligations
3.Download of obligation and pay-in advice of
funds/securities
4.Instructions to clearing banks to make funds
available by pay-in time
88

89. 5.Instructions to depositories to make securities available by pay-in-time
6.Pay-in of securities
7. Pay-in of funds
8. Pay-out of securities
9. Pay-out of funds
10. Depository informs custodians/CMs through DPs Clearing Banks inform
custodians/CMs
89

90. AUCTION SETTLEMENT
• On the settlement day NSCCL accepts pay-in of securities made
by members through depositories and identifies the shortages
• The members are debited by an amount equivalent to the
securities not delivered and valued at a valuation price. This is
known as valuation debit
• For all such short deliveries NSCCL conducts a buying-in auction
on the T+2 day, after completion of the pay-out, through the
NSE trading system
• If the buy-in auction price is more than the valuation price, the
CM is required to make good the difference. All shortages not
bought-in are deemed closed out.
90

91. AUCTION SETTLEMENT
DAY JOB PERFORMED
T(TRADE DAY) TRADE DAY
T+1 PAY-IN/PAY-OUT OF SECURITIES
AND FUNDS
T+2 AUCTION SESSION
T+3 PAY-IN/PAY-OUT AND CLOSE OUT
SESSION
T+4 BAD DELIVERY REPORT
T+5 CLOSE OUT POSITION
91

92. RISKS IN SETTLEMENT
• Settlement Risk
• Liquidity Risk
• Operational Risk
• Systemic Risk
• Replacement Risk
• Principal Risk
• Legal Risk
• Market Risk
92

93. INTERNET BASED TRADING
• Broker is eligible for providing IBT (Internet Based Trading) facilities.
• Provided through wireless technologies through various devices using Internet
Protocol.
• Broker to comply with requirements laid by SEBI/ Exchanges updated regularly.
• Availability of the service posted on brokers website.
• Educating client about the use of the facility
93

94. INTERNET BASED TRADING
• Initial Password generated by IBT.
• Policy in line with norms prescribed SEBI/Exchange.
• Client responsible for the security of the Username & Password.
• Misplacement of Password or Unauthorised access to account shall be bought
to the notice of Stock broker in writing.
• Client responsible for any misuse.
94

95. CIRCUIT BREAKERS
95

96. CIRCUIT BREAKERS
• For Equity Shares, daily price bands of 2%, 5%, 10% & 20% are
applicable
• No price bands are applicable on scrips on which derivatives products
are available
• Price band of 20% on all remaining scrips (including debentures &
preference shares)
96

97. DEMATERIALISATION OF SHARES
 Introduced in India through the enactment of the Depositories Act,
1996.
 It is not mandatory
 One may keep its holding partly in physical form and partly in DEMAT
form.
 Although, investors have an alternative to hold securities and settle
trades in physical forms, they need a DEMAT account as, in practice
almost all trades on stock exchanges are now being settled in DEMAT
form only.
Need for Dematerialization
97

98. DEMATERIALISATION PROCESS
1. The client (registered owner) will submit a request to the DP in
the Dematerialisation Process
2. The DP will verify that the form is duly filled in and all details are given in
the form
3. The DP will scrutinize the form and the certificates
4. In case the securities are in order, the details of the request as mentioned
in the form are entered in the DPM (software provided by NSDL to the DP)
and a Dematerialisation Request Number (DRN) will be generated by the
system.
98

99. DEMATERIALISATION PROCESS
5. The request is then released & forwarded electronically to DM (DM -
Depository Module, NSDL's software system) by DPM.
6. The DM forwards the request to the Issuer/ R&T agent electronically.
7. The DP will punch the certificates on the company name so that it does not
destroy any material information on the certificate.
8. The DP will then despatch the certificates along with the request form and a
covering letter to the Issuer/ R&T agent.
99

100. DEMATERIALISATION PROCESS
9. The Issuer/ R&T agent confirms acceptance of the request for
dematerialisation in his system DPM (SHR) and the same will be forwarded to
the DM, if the request is found in order.
10.The DM will electronically authorise the creation of appropriate credit
balances in the client's account.
11.The DPM will credit the client's account automatically.
12.The DP must inform the client of the changes in the client's account following
the confirmation of the request.
100

101. REMATERIALISATION OF SHARES
• Rematerialisation is the process by which a client can get his electronic holdings
converted into physical certificates
• Rematerialisation Process
1. The client has to submit the rematerialisation request to the DP with whom he
has an account
2. The DP enters the request in its system which blocks the client's holdings to that
extent automatically
3. The DP releases the request to NSDL and sends the request form to the Issuer/
R&T agent
4. The Issuer/ R&T agent then prints the certificates, despatches the same to the
client and simultaneously electronically confirms the acceptance of the request
to NSDL
5. Thereafter, the client's blocked balances are debited
101

102. TERMINATION OF RELATIONSHIP
• Relationship between the stock broker and the client shall be terminated, if
the stock broker ceases to be a member of the stock exchange.
• Broker, sub-broker and client can terminate the relationship after giving
notice of 1 month in writing.
• All transaction prior to termination shall continue to be vested in interest of
respective parties.
• Inability of the sub broker to continue transactions to be intimated to the
client.
• ‘Rights & Obligations’ document to remain in force unless client withdraws
the same.
102

103. WHO CAN BE MEMBER OF
EXCHANGE?
• No entry / exit barrier to member of NSE
• Person Eligible are:
• Individuals (Sole Proprietor)
• Partnership Firms registered under the Indian
Partnership Act, 1932
• Bank for Currency Derivative segment
• Corporations, Companies or Institutions
103

104. 104

105. SUSPENSION OF MEMBERSHIP
MISCONDUCT
Fraud & Violation
• Breach Rules, Bye Laws & Regulations
Failure to submit audited accounts
Failure to pay dues and fees
• Failure to give information to the exchange
105

106. UN-BUSINESSLIKE CONDUCT
Market manipulation and Rigging
• Dishonoured cheque
Transaction in fictitious name
• Circulation of rumours
106

107. UN-PROFESSIONAL CONDUCT
Dealing in securities which is not permitted
Evasion of brokerage charges
• Dealing with the entities prohibited by SEBI
107

108. ARBITRAGE OPPORTUNITY IN
STOCK MARKET
• Arbitrage is the practice of taking advantage of a price difference
between two or more markets or exchanges.
• In Indian markets stocks are traded in two major exchanges – NSE
(National Stock Exchange) and BSE (Bombay Stock Exchange)
• It means you can take advantage of buying the stock in one exchange
and selling it in other and bag the difference as profit.
108

109. POINTS TO CONSIDER BEFORE DOING
ARBITRAGE TRADE
1. Arbitrage is not An Intraday Trade
2. Last Traded Price is not the Price for Arbitrage
• If you are seeing a price difference of few Rupees in both the exchanges
does not always means there is an arbitrage.
• Take an example of Weizmann Forex.
109

110. • So if you see the offer price and bid price in both the exchanges they are
• Offer price in NSE is 74.90 for 48 shares.
• Bid price in BSE is 67.30 for 50 shares.
• So if you execute the trade then your offer price should be 67.30 in BSE and
Bid Price in NSE as 74.90 and that would mean you are buying high and
selling low making a loss and not a profit arbitrage.
• So arbitrage exists only if you have higher bid price and lower offer price in
either of the exchanges.
110

111. 3. Arbitrage Trades should never be Manual
• As a retail investor we may be able to spot some arbitrage opportunities but
if you try to key in those trades manually, the opportunity may be gone
because there are so many big traders who have automated software
running for spotting such arbitrages and execute those trades
111

112. ARBITRAGE OPPORTUNITIES
112

113. CAPITAL REQUIREMENT
Net worth = Capital + free reserve – Non allowable share
Deposit Requirement:
 Interest free security Deposit (IFSD) - Liquid cash
 Collateral Security Deposit (CSD) - Cash or Non cash form
113

114. RISK MANAGEMENT
Sound risk management system is integral to an efficient clearing and settlement
system:
• Capital adequacy requirements of members
• NSCCL - comprehensive risk management system, which is constantly
upgraded to pre-empt market failures
• Standard Portfolio Analysis of Risk (SPAN) - calculates performance
bond/margin requirements
• IT - monitors track record of member (net worth, position and exposures of
each member)
• Screen based trading system
114

115. CAPITAL ADEQUACY REQUIREMENTS
Trading members are required to provide liquid
assets which adequately cover various margins &
minimum capital requirements
Capital Adequacy Norms for Membership (₹ in lakh)
Particulars CM and F&O segment CM, WDM, and F&O
segment
Net Worth 100 200
Interest free security
deposit
125 275
Collateral security
deposit
25 25
115

116. BASE MINIMUM CAPITAL
All Members are required to maintain a BMC with
Stock Exchange in the prescribed manner at all times.
Members shall maintain the prescribed BMC based
on their profiles.
Category BMC Deposit
Only Proprietary trading without
Algorithmic trading (Algo)
10 Lacs
Trading only on behalf of Client
(without
proprietary trading) and without Algo
15 Lacs
Proprietary trading and trading on
behalf of Client without Algo
25 Lacs
All Trading Members/Brokers with Algo 50 Lacs
116

117. BASE MINIMUM CAPITAL
Break-up of BMC:
 Cash Minimum 12.5%
 Fixed Deposit Receipt(s) or Bank Guarantee(s) issued by bank(s)
(minimum 37.5%)
 balance in the form of eligible shares
The eligible shares for the purpose of the securities portion of the
BMC are A and B group securities.
BMC is not available for adjustment towards margins.
117

118. MARGINS
Margin – key part of Risk management system
Various kinds of margins imposed on the Members
based on their outstanding positions in the market.
TYPES OF
MARGINS
VAR
EXTREME
LOSS
MARK – TO
- MARKET
118

119. VAR MARGIN
VAR Margin is at the heart of margining system for
the cash market segment.
 It answers the question, “How much is it likely to
move over next one day?”
119

120. EXTREME LOSS MARGIN
The Extreme Loss Margin for any stock is higher of:
 5%, or
 1.5 times the standard deviation of daily logarithmic returns
of the stock price in the last six months.
It is collected/adjusted against the total liquid assets of the
member on a real time basis.
It is also collected on the gross open position of the Member.
No netting of positions across different settlement
120

121. MARK-to-MARKET MARGIN
Mark to market margin is calculated by marking each transaction in
scrip to the closing price of the scrip at the end of trading
The MTM is computed after trading hours on T day on the basis of
closing price, of that day
MTM is collected first by adjusting the same from the available
liquid assets and the balance MTM in form of cash from the
Member
121

122. SPECIAL MARGINS
• Imposed by BSE from time to time on certain scrips as a surveillance
measure and informed to the members through notices.
• Collected first, by adjusting the same from the available liquid assets
and the balance in form of cash from the Members through their
clearing banks on the same day
• Released on completion of pay-in of the settlement
122

123. MARGIN SHORTFALL
In case of any shortfall in margin:
 The members are not permitted to trade with immediate effect.
 Penalty for margin violation
Instances of Disablement Penalty to be levied
1st instance 0.07% per day
2nd to 5th instance 0.07% per day + Rs 5000/- per instance from 2nd to
5th
6th to 10th instance 0.07% per day + Rs20,000 (for 2nd to 5th instance) +
Rs10000 per instance from 6th to 10th
11th instance onwards 0.07% per day + Rs70000( for 2nd to 10th instance) +
Rs10000 per instance from 11th instance onwards.
Additionally member referred to Disciplinary
committee for suitable action
123

124. GROSS EXPOSURE
SE uses this Gross Exposure Limit as a tool to control the activities of
the broker
The maximum permissible gross exposure is a multiple of the Net
Total Base Capital (NTBC) available and is determined as under :
Members exceeding these limits are automatically and
instantaneously disabled by the automated trading system. A penalty
of ₹ 5,000 is levied.
Total Base Capital (₹ Crore) Gross Exposure Limit
0-1 8.5 times the NTBC
>1 ₹ 8.5 crores plus 10 times the
total base capital in excess of ₹ 1
crore
124

125. SETTLEMENT GUARANTEE FUND
Provides the cushion for any residual risk
Funded through the contributions made by trading members, transaction
charges, penalty amounts, fines etc.
A part of the cash deposit and the entire security deposit of every clearing
member - converted into an initial contribution towards the Settlement
Guarantee Fund
As an when volumes of business increase, members may be required to make
additional contributions allowing the fund to grow along with the market
volumes.
125

126. BROKERS CONTINGENCY
FUND
To ensure - settlement cycles at the Exchange are not affected due to the
temporary financial problems
Active members are required to make an initial non-refundable contribution
of ₹1,000/- to the Fund and also contribute ₹ 0.075 for every 1 Lac rupees of
gross turnover
Advance from the Fund up to a maximum of six times in a financial year
Interest Rates:
• For the first three times in a financial year @12% p.a.
• For the next three times in a financial year @15% p.a.
Advance up to a maximum of ₹25 lakhs.
126

127. TRADE GUARANTEE FUND
To ensure that the market equilibrium is not disturbed in case of
payment default by the members
To ensure timely completion of settlements of contracts and thereby
protect the interest of investors
Every member is required to provide to the Fund a bank guarantee of
₹10L
Contribution of ₹ 0.01 for every ₹ 1L of gross turnover made by the
member
127

128. INVESTOR PROTECTION
FUND
IPF is utilized to settle claims of such investors whose trading member
has been declared as defaulter
Maximum amount of claim payable from the IPF to an investor is
₹11 L
Members contribution to the Fund is ₹ 0.15 per ₹ 1L of gross turnover
Interest earned by SE on security deposit kept with it by the
companies making public/rights issues is credited to the Fund
128

129. CONTROL OF RISK
KYC Scheme
Database of lost, Stolen ,
Misplaced Securities
Client Caution Database
Verification of shares at
members office
Inspection
129

130. KNOW YOUR CLIENT (KYC)
Member brokers have to compulsorily obtain detailed information
of not only the new clients, but also the existing clients
This information should be made available to the Stock Exchanges
In case the member brokers fail to furnish the same it is viewed
seriously.
130

131. DATABASE OF LOST, STOLEN,
MISMATCH SECURITIES
Stock Exchange maintains database of the report
Reports are developed by the Companies/Registrars
Database is updated regularly
Also used by the Clearing House
Defaulting person can be a broker or a client and strict action would be
taken against that person
131

132. CLIENT CAUTION DATABASE
Risk Management Department along with the Bad Delivery Cell
maintain client database
It is downloaded by the Member Brokers whenever a new client is
been admitted for verification purpose.
132

133. VERIFICATION OF SHARES
AT MEMBERS OFFICE
Purchasing or Selling of shares more than ₹ 10L
This method of Risk Management is important there
exists a large volume of deliveries
133

134. INSPECTION
The department is carrying out inspection of the
member brokers records as regards compliance of
the risk management procedures.
134

135. THANK YOU!
135