UDAY

TARDALKAR

VICE PRESIDENT TATA SECURITIES LIMITED

INTERMEDIARIES
1 2 3 4 5 6 7 8
STOCK EXCHANGES INVESTMENT BANKERS BANKERS BROKERS REGISTRARS CUSTODIANS DEPOSITORY DEPOSITORY ARTICIPANTS

VARIUOS ROLES
BROKER

1 2 3
4

INVESTMENT BANKING DISTRIBUTION DEPOSITORY PARTICIPANT TRADING

5 6 7 8

CLEARING MEMBER PORTFOLIO MANAGER ADVISORY MARGIN TRADING

1) INVESTMENT BANKER
PROMOTOR

IPO

OFFER FOR SALE

FPO

FUND RAISING
PVT PLACEMENT Rights

Wide Retail Network IPO 1. KNOW YOUR CLIENT (KYC) 2. PAPERLESS PROCESS 3. AVOIDING MULTIPLE DATA CAPTURE 4. DEMAT CREDIT 5. ECS NFO PAN MUTUAL FUND UNITS PAN

2) DISTRIBUTOR

3)DEPOSITORY PARTICIPANT
1. DEMAT 2. ACCOUNT

TRANSFER 3. OFF MARKET TRANSFER 4. TRANSMISSION 5. PLEDGE 6. LENDING AND BORROWING

(4 and 5)TRADING AND CLEARING MEMBER

Clearing

A process of determination of obligations of members, after which the same are discharged by settlement.

Settlement

A process of settling

of transactions in securities between buyers and sellers on the stock exchange by exchange of Money and Securities respectively.

6)PORTFOLIO MANAGEMENT
Systematic management -Ongoing basis Monitoring Market variations

Identification

of Securities Allocation of investment Identifying asset classes. Weightings/Proportion : Securities in the portfolio. Security selection within the asset classes - Sector

7)ADVISORY
REPORTS Daily :Opening and Closing of Market Sector Reports Theme Reports Intraday Reports Pre/Post Budget Event Reports Quarterly/Credit Policies

ADVISORY
SMS CHAT WEBSITE HARD COPIES

8)MARGIN TRADING
Margin Trading facility :Offered in all the securities eligible for margin trading facility Prescribed from time to time by SEBI/Stock Exchanges . The initial and maintenance margin by the client: A minimum of 50% and 40% respectively, to be paid in cash. Liquidation of the securities in case the clients deposit in the margin account (after adjustment for mark to market losses) falls to 30% or less

Reforms in Trading

Transition from open outcry to screen-based Change from person-dependent to anonymous system Single city to nation-wide operation Evolution of share shops - sub-brokers and franchisees Expansion of trading capacity Use of internet technology for trading
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Reforms in Clearing & Settlement

Establishment of depositories and depository participants Transition from paper-based to demat

elimination of paper-based risks

Creation of clearing corporations/clearing houses Accounting Period Settlement Abolished. Shrinkage and streamlining of post-trade cycle
move to rolling settlements (T+5 T+3 T+2)
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NEED AND FACILITATOR

Emergence of different class of Investors -VRS -Housewives -Day Traders

Online Risk Management Control on F& O Positions

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Market Intermediaries

Broker Agent for clients Sub-broker Agent to broker having his client base Market Maker/Jobber Providing two-way quotes (bids/offers) Day Trader Typical trader carrying out buying and selling and not having any outstanding position at EOD. Arbitrageur Trader taking advantage of difference in price of a security traded on two or more stock exchanges between equities market and derivatives market

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Features of Platform
Includes charts and graphs News feeds produced in real time. Transparency Speed of Execution Anonymity Lower Cost to Trade

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Seamless link - various financial intermediaries Electronic media using an interface with back office system Trading capacity of the exchange. Reduce operational inefficiencies faced in the manual system. Take care of huge volumes and have the scalability to add On-line and off-line monitoring, and surveillance

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Surveillance Activity

Detect unusual price/vol. Movements. at initial stage & take corrective measures. Reduce the possibility of Market Participants to influence price and volume of securities Control Default Risk through Position Monitoring Strengthen the Self Regulatory Mechanism
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Circuit Filter Structure

A O l l L i s t e d S c r i p s

t h e r s 2 0 % ( m a x )

S c r i p s o n w h i c h r i v a t i v e p r o d u c t s N o C i r c u it F i l t e r

06/26/12

Market Wide Circuit Breaker- Prescribed by SEBI Calculated on Closing Index of the Qtr Percentages Converted into points Round off to nearest 25 points for Sensex Revisions made every Quarter Eg 10%= 1475 pts 15% = 2200 pts 20% = 2925 pts

06/26/12

Market Wide Circuit Breaker- Prescribed by SEBI Bef 1 PM 1 HR Halt 1.00- 2.30 1/2 HR Halt After 2.30 No Halt

06/26/12

Market Wide Circuit Breaker- Prescribed by SEBI Bef 1 PM 2 HR Halt 1.00- 2.00 1 HR Halt After 2PM Halt for rem Day

06/26/12

Market Wide Circuit Breaker- Prescribed by SEBI

Any Time

Halt for rem Day

06/26/12

Surveillance Activities
1. Price Monitoring 2. Position Monitoring 3. Investigation

06/26/12

Price Monitoring
1. On-Line & off-Line Surveillance 2. Rumour Verifications

06/26/12

On-Line Surveillance Capabilities

On-Line analysis Scrips causing rise or fall of indices . The members who have traded in those scrips Monitor Member/client Concentration in specific scrip Access to Trades & Orders of Members with time stamping Graphic display of movement of prices over a period of time (Day/year) Position of Top n Members v/s the rest of Market

06/26/12

On line Surveillance
On-Line real time Monitoring of Markets using Surveillance Systems Alert Mechanism Benchmarks
Price Volume Position

Trigger-- Alert

06/26/12

 Some Indicative Alerts

Surveillance

% change in prices over a period of time Trading in infrequently traded scrips Scrips hitting 52 week New High / Low (on Rolling Basis) Surveillance actions or Investigations initiated in the scrips identified from the above-stated alerts.

06/26/12

Surveillance Tools & Actions

Special Margins @ 25/50/75 % on Buy/Sell/Both sides. Reduction of Circuit Filters Transfer of a scrip on trade-to trade settlement basis Suspension of a scrip Issuing of warning / or Imposition of penalty on members involved/ deactivation of BOLT terminals/ suspension

06/26/12

Block Deal Disclosure

Block Deal order size Minimum of : I) 5,00,000 shares or ii) Rs. 5 Crore Order Value (Order Qty * Order Value).

Bulk Deal Disclosure Delivery Trade .05%

Block Deal Disclosure

Features: Execution Time on Exchanges: first 35 minutes from start of market hours (normally 9:15: a.m to 9:50a.m.) Valid Price range: within +/-1% from the ruling market price (i.e. last traded price) or the previous closing price (if there is no trade executed in the scrip before entering of the block deal orders) subject to the applicable circuit filter limits. BLOCK DEAL Transactions has to be settled on a Trade to Trade Basis (e.g. as settled in T Group). Exchanges to disseminate the information.

Sequence of Trade

Order Entry Order Confirmation Trade Trade Confirmation Exercise in Case of Options Settlement of Position
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Trader Workstation

Real-time display of best buy/sell orders Online trade execution and confirmation Display of market data statistics Continuous calculation of market indices Flashing of ticker messages Dissemination of market announcements
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The Platforms
Online and Offline Trading Platforms Types of Trading Platforms in India BOLT- Bombay On-line Trading System NEAT- National Exchange for Automated Trading .

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BOLT-BSE
Electronic trading platform Members hierarchy LAN and leased lines- Local V-SATs for upcountry members. Based on Price and Time Priority Basket Trading Facility VaR & ELM Margin Blocked Allows setting of various checks, limits, for better control . Provides analytical data to the exchange

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WEBEX
BSEwebx:Offering all the products and services through a single internet platform. Running both on the internet and the BSE Private Network Allows members, their hierarchy and investors to trade and manage risk directly.

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Fully automated screen-based trading-Offers transaction protection, robust inter-process communication and network interface. Index information - transmitted online to users through NEAT to ensure fair trading in the derivatives market Simultaneously- similar real time information to leading info vendors and news agencies who in turn disseminate them to various actual users.

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NEAT

PROGRAMMED TRADING
A bulk order - executed for a selected portfolio Difficult to punch all the entries at a time into the system as the system works on time priority also. Order file is created offline it is uploaded into the trading system(NEAT/BOLT etc) This facility available on the trading platform is called basket trading also 38

Programmed Trading

Individual Order Level:

Quantity Limits check Price Range checks Trade price protection checks Order value checks Net position v/s available margins RBI violation checks for FII restricted stocks Position limit checks Trading limit checks Exposure limit checks at individual client level and 39

Client Level:

Internet Trading - Overview

CURRENT STATISTICS:

Total no. of people trading in shares 1.97Cr*. 21-27%* are trading online.
Total online customers:-38/45Lacs

Product Basket

Equity : Place online trades for virtually any stock listed on NSE & BSE. Margin Trading : Execute Intra-day Margin Orders upto 3 to 4 times your available funds. F&O : With a Derivative-approved Account, you can pursue a wide range of Futures & Options trading strategies with speed and ease. IPO Online : Invesing Online in IPOs at the click of a button. No paperwork no queues. Get information on IPO news , Forthcoming IPOs and a lot more

Product Basket

GOI Bonds : Fixed income securities can help reduce your risk. Invest online in GOI Bonds. Mutual Fund : Offer Online access to mutual fund schemes from leading fund families. Commodity : Metals, energies, grains and livestock Insurance : Life insurance provides financial security against an unpredictable future .

Web Site & Content

Technical Charting Portfolio Tracker IPO Research Tools Mutual Funds Research Tools Commodities Research Tools Basic Tools for the end customer

Order Matching Rules

The best buy order matched with best sell order An order may match partially & resulting in multiple trades The best buy order is the one with the highest price The best sell order is the one with the lowest price Orders lying unmatched in the system are 'passive' orders Orders that come in to match the existing orders are called 'active' orders. Orders are always matched at the passive order price.
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TYPES OF ORDER: Market order: An order that requires immediate execution at the best price available. Limit order: An order to transact at a specified price. This guarantees the price at which you will buy or sell a security. Stop Order: A market order that trades after a specified level has been reached. This may be a stop-loss or stop-limit. The exact price cannot be guaranteed, but this can be a good way to protect your downside.

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 All or None (AON): A stipulation on

a limit order either to buy or sell a security only if the broker can fill the entire order, not part of it Day Order: An order that expires at the end of the business day if it has not been executed GTC (Good Till Canceled): An order either to buy or to sell a security that remains in effect until the customer cancels it or until it is executed by the broker.
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CLEARING AND SETTLEMENT

Clearing
A process of determination of obligations of members, after which the same are discharged by settlement.

Settlement : A process of settling

of transactions in securities between buyers and sellers on the stock exchange by exchange of Money and Securities respectively.

Funds Settlement

FUNDS PAY IN: Members having purchase value more than sells have an obligation to make net payment to Clearing House through the clearing account with any designated bank. Funds obligations are debited to members clearing accounts on T+2 at 10:30am. Funds Pay-out The members having more sells value than purchases receive a credit by net amount by Clearing House on T+2 at 2:30pm. Every members is required to have clearing account with exclusive with any of the approved clearing banks.

Accounting Period settlement

Mon Tue Wed Thu Fri Sat Sun Mon Tue Wed Thu Fri Sat

Trade Day (T)

Pay-in Pay-in Pay-out (Phy) (Dmat) (Phy+Dmat)

Pay-in deadline : 3:30 p.m.

Rolling settlement
Mon Tue Wed Thu Fri Sat Sun Mon P1 Tue Wed Thu Fri Sat

T1 T2 T3 BSE Phy. segment: NT Dmat segment: AU NSE Phy. segment: EE Dmat segment: CC T4 T5

P2 P3 P4 P5 Trade Days (Each taken as a different settlement) Pay-in & Pay-out (same day)for each trade

Pay-in deadline : 10:30 a.m

Structure of the Depository System Electronic Linkage

Issuer Stock Exch. (CC/CH)

NSDL

DP

Client

Clearing Member (Broker)

Settlement Mechanism for Market Transfers

Assumption: 1. Clients and their CMs have common DPs 2. CMs have given standing instructn for credits to Pool A/c Funds pay-out by CC/CH

CC Settlement A/c CC Transit A/c

Note: Funds transfer takes place outside the NSDL System

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Pay-in of securities

NSDL

Funds pay-in to CC/CH

4
CM1 Delivery Pool A/c

Pay-out of securities Receipt

9
CM2 Delivery Pool A/c

Receipt

DP1

Issuer/RTA
Data Downloaded

10

11

DP2

10

Sellers BO A/c
Pay-in Instructn Debit Instructn Funds

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Credit Instructn

Buyers BO A/c
Pay-out Instructn Funds

CM1

Selling Client

Buying Client

CM2

1. Debit instructions by selling client to DP in favor of his broker (CM1) 2. Transfer by DP to CM1 Pool A/c 3. Pay-in instruction by CM1 to DP 4. Transfer from CM1 Pool a/c to Delivery a/c 5. Transfer from Delivery a/c to CC Transit a/c 6. Transfer by NSDL from CC Transit a/c to CC Settlement a/c

7. Pay-out from CC Settlement a/c to CC Transit a/c 8. Transfer by NSDL from CC Transit to CM2 Receipt A/c 9. Auto transfer from Receipt a/c to CM2 Pool A/c 10. Pay-out instr. by CM2 to DP Credit instr. by BO to DP 11. Transfer from CM2 Pool a/c to Buying Clients BO A/c 12. Download to Issuer / RTA

Clearing & Settlement Processes

Trade confirmation: counter parties agree to terms of trade (security, quantity, price and settlement date) Auto confirmation in electronic trading system Obligation determination: counter parties informed about delivery/receipt obligations Clearing Corporation (CC)- central counter party Pay-in of funds and securities: counter parties transfer funds / securities to CC. Depositories transfer securities from counter party accounts to CC CC issues electronic debit instructions to the clearing banks for payment obligations of counter parties

Pay-out of funds and securities: after processing for shortage of funds/securities, CC sends electronic instructions to depositories/clearing banks for releasing pay-out of securities/funds Risk management: Monitoring of track record

Clearing & Settlement Processes: contd

and performance of trading members in relation to their net worth

Online monitoring of positions and exposures Collection of margins Automatic disablement of trading members if the limits are reached

Back Office Operation Processes

Back Office Operations (BOO) begin at the end of the trading day. These operations are mainly responsible for settlement of trades executed by the Company on behalf of its clients. Main activities involved in BOO are as follows: Uploading of trades in Back Office System Matching of obligation Generation, printing and issuing of Contract Notes Pay-in of funds Pay-in of securities Auction Pay-out of funds Pay-out of securities

RISK MANAGEMENT
Risk is exposure to uncertainty. Uncertainty and Exposure to that uncertainty.
The Risk Management System (RMS) Reviewing credit and market risk management policies, procedures and issues on a regular basis and ensuring adherence to the same

Types of Risk
There are at least six categories of Risks that an Investor should consider. 1. Interest Rate Risk(Rising/Falling Rates) 2. Economic Risk (Inflation/Deflation/Disinflation) 3. Business Risk (Fraud/Incompetence/Competition) 4. Market Risk (Supply/Demand) 5. Conversion Risk (Liquidity/Marketability) 6. Government Risk (Taxes/Regulations)

What Is Your Risk Tolerance?

1. 2.

3. 4.

Your risk tolerance is the way you choose to manage risks. Risks can be handled in one of four ways or combinations of the four: Retain--With no protection as in holding Stock. Shift--A contractual arrangement in exchange for a premium. The more risk you shift, the higher the cost. Self-insure--Emergency Reserve fund/ profits. Avoid--Not to take position beyond comfort level.

RMS IN BROKING HOUSE

The adherence to procedures and periodic review of the same is done by the Risk Management Committee (RMC) Retail Head, Head of Dealing Compliance Manager, Risk Manager and CFO.

Assigning limits
Net worth, Portfolio of the client, Estimated income of the client, Profession of the client, Reputation of other brokers with whom the client is registered, Introducers reputation etc.

 CASH/SECURITIES

: FIVE TIMES SECURITIES:A GROUP/30%HairCut RMC to Reviewing credit and Market risk management policies and Procedures Risk Manager Convener Members CEO Compliance head Chief Financial Officer Retail head

MARGIN /EXPOSURE LIMITS

Operating Guidelines
The

RMC meetings Regular basis at the discretion of the RM. The RMC reviews adherence to the RMS and discusses issues as evidenced in the daily operations. Exceptions covered within the policy framework to be approved by RMC Policy changes or exceptions beyond the policy Approval of

Margin & Exposure

Initial Margin Rs 30000 per contract for Derivatives Segment. Exposure 4 times for Delivery based and up to 8 times for intra-day limits. Margins- In the form of Cash, Approved stocks, FD All Mark To Market (MTM) : CASH from the client before 11:00 a.m of the next day .

Margin & Exposure

RM

daily reviews an Exposure monitoring statement based on end of the day positions. The next days limits are set based on this statement and the request received from the Retail Head High Risk clients are flagged by RM, and notified to the Retail Head.

Square off trigger Dealer to inform the client and RM. As far as possible, square offs without intimation to client is avoided. All Intra Day positions are squared off by 3.15 p.m. However, on request by the client before 3.15 p.m., Dealers have the discretion to keep the clients purchase position open. Payment towards the obligation should be in the custody By 12

Before squaring off 3.15 p.m., all the pending orders are cancelled Client not honoring commitment on T+2 is termed as a default. Delayed Payment Charges are levied @ 15% of the amounts due. Position Squared off on T +5 Day After 2.30 p.m., fresh purchase are created only against the clients commitment to settle the same through delivery and payment. No fresh sale positions are created after

 Intraday:

Enforced online and during trading hours. Monitoring by RMS The RM to inform RH when the client's MTM loss reaches 40% of the margin, the RH to intimate the client. If the client fails to pay to increased exposure, and the MTM loss reaches 50% position would be squared off by intimating the client

Blow Out Guidelines

End of day: This process commences once the back office system gets updated at the end of the day. This is applicable to clients who for some reason do not square off their position by the end of the trading session and default on payment (i.e. does not pay by 12 pm of the next day). The position would be squared off during the day at the discretion of the BM and RH.

Clients on Watch List/ Restriction

A

client is put on a Watch List or Restricted list: If he/she displays more than two incidences of late settlement. When he/she bounces a cheque at least once. At management discretion or if the RM suspects the existing

Surveillance of Scrips
EOD report for Quantities>10000 shares Amount Exceeding One Million Greater than .5% of the Share Capital Monitoring the transactions of PENNY Stocks Accumulation of stock in last few settlements Trade at unreasonable price

RMS is mix of science and art. Losses are inevitable, but one must learn from the past. Risk is not bad, but risk that is misplaced, mismanaged or unintended is bad. A clear distinction should be made between risk management and risk taking. Risk management oversees and ensures the integrity of the process with which risks are taken. To maintain the objectivity, risk management cannot be a part of the risk taking process.

Conclusion

THANK YOU
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