Ebook- Certified investment banking
MARKET INFRASTRUCTURE INSTITUTIONS -2
The member-brokers can effect pay-in of demat securities to the Clearing House either through the National Securities Depository Ltd. (NSDL) or Central Depository Services (I) Ltd. (CDSL). In case of NSDL, the member- brokers are required to give instructions to their respective Depository Participants (DPs) specifying settlement no., settlement type, effective pay-in date, quantity, etc.
As regards CDSL, the member-brokers give pay-in instructions to their respective DPs. The securities are transferred by the DPs to the Clearing Member (CM) Principal Account. The member-brokers are required to give confirmation to their DPs, so that securities are processed towards pay-in obligations.
Alternatively, the member-brokers may also effect pay-in from the clients’ beneficiary accounts. For this, the clients are required to mention the settlement details and clearing member-broker ID of the member-broker 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 in the trading day
As regards CDSL, the member-brokers give pay-in instructions to their respective DPs. The securities are transferred by the DPs to the Clearing Member (CM) Principal Account. The member-brokers are required to give confirmation to their DPs, so that securities are processed towards pay-in obligations.
Alternatively, the member-brokers may also effect pay-in from the clients’ beneficiary accounts. For this, the clients are required to mention the settlement details and clearing member-broker ID of the member-broker 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 in 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 member-brokers 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 International Securities Identification Number (ISINs).
The member-brokers 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
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 International Securities Identification Number (ISINs).
The member-brokers 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
Pay-in of securities in physical form
In case of delivery of securities in physical form, the member-brokers have 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.
Funds Pay-in
Once the reconciliation of securities is completed by the Clearing House, the bank accounts of member-brokers maintained with the ten clearing banks, are directly debited through computerized posting for their funds settlement obligations.
Securities Pay-out
In case of demat securities, the same are credited by the Clearing House in the Pool/Principal Accounts of the member-brokers. The Exchange has also provided a facility to the member-brokers 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
Funds Payout
The bank accounts of the member-brokers having pay-out of funds are credited by the Clearing House with the Clearing Banks on the same day. This process is referred to as Pay-out of Funds.
In case, if a member-broker fails to deliver the securities, then the value of shares delivered short is recovered from him at the standard/closing rate of the scrips on the trading day.
Market Abuse
It is a broad term which includes abnormal price/ volume movement, artificial transactions, false or misleading impressions, insider trading, etc. In order to detect aberrant behaviour/ movement, it is necessary to know the normal market behaviour
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NATIONAL STOCK EXCHANGE OF INDIA LTD. (NSEIL)
Based on Pherwani Committees report submitted in June, 1991, the National Stock Exchange of India Limited (NSEIL) was established to provide an efficient system eliminating all the deficiencies of stock exchanges and is geared to meet the requirements of the large investor population.
It is a single stock exchange and all other centres are electronically linked to this exchange. NSEIL was promoted by leading FIs at the behest of Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSEIL commenced operations in the Wholesale Debt Market (WDM) segment in June 1994, operations in the Capital Market (CM) segment in November 1994, and operations in derivatives segment in June 2000
It is a single stock exchange and all other centres are electronically linked to this exchange. NSEIL was promoted by leading FIs at the behest of Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSEIL commenced operations in the Wholesale Debt Market (WDM) segment in June 1994, operations in the Capital Market (CM) segment in November 1994, and operations in derivatives segment in June 2000
Capital Market Segment
The Capital Market (CM) segment of NSEIL provides a fully automated screen based trading system for trading of equity and preference shares, debentures, warrants and coupons. The trading system, known as the National Exchange for Automated Trading (NEAT) system, is an anonymous order-driven system and operates on a strict price/time priority. It enables members from across the country to trade simultaneously with enormous ease and efficiency
Wholesale Debt Market Segment
The WDM segment provides the only formal trading platform for trading of a wide range of debt securities. Initially, government securities, treasury bills and bonds issued by public sector undertakings (PSUs) were made available for trading. This range has been widened to include non-traditional instruments like floating rate bonds, zero coupon bonds, index bonds, commercial papers, certificates of deposit, corporate debentures, state government loans, units of mutual funds.
Contracts
Futures contract on the NSEIL is based on S&P CNX Nifty Index. Currently, it has a maximum of 3-month
expiration cycle. Three contracts are available for trading with 1 month, 2 months and 3 months expiry. A new contract is introduced on the next trading day following the expiry of the near month contract. Various conditions like, Good-till-Day, Good-till-Cancelled, Good-till- Date, Immediate or Cancel, Stop loss, etc. can be built into an order
Clearing and Settlement
NSCCL undertakes clearing and settlement of all deals executed on the NSEIL’s Derivatives segment. It acts as legal counterparty to all deals on the Derivatives segment and guarantees settlement.
Derivatives Segment
In the Derivatives segment, NSCCL has admitted Clearing Members (CMs) distinct from Trading Members (TMs) in line with the 2-tier membership structure stipulated by SEBI to enable wider participation in the Derivatives segment. All trades on the Derivatives segment are cleared through a CM of NSCCL.
TRADING AND SETTLEMENT AT NSE
Automated screen based trading
NSE introduced for the first time in India, fully automated screen based trading. It uses a modern, fully computerised trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest.
The NSE trading system called ‘National Exchange for Automated Trading’ (NEAT) is a fully automated screen based trading system, which adopts the principle of an order driven market.
National Securities Clearing Corporation Limited (NSCCL)
This company incorporated as a wholly owned subsidiary of the National Stock Exchange of India Limited carries out clearing and settlement of the trades executed in the capital market segment of National Stock Exchange. This company completes the settlement promptly without delay or deferment. It operates on behalf of the clearing members from and to regional clearing centres and central clearing centres at Mumbai. It was the first organisation to start pre-delivery verification to detect bad papers in the form of fake or forged certificates or lost and stolen share certificates through the automated mechanism of the clearing corporation.
Clearing Mechanism
Trades in rolling segment are cleared and settled on a netted basis. Trading and settlement periods are specified by the Exchange/Clearing Corporation from time to time. Deals executed during a particular trading period are netted at the end of that trading period and settlement obligations for that settlement period are computed. A multilateral netting procedure is adopted to determine the net settlement obligations.
Clearing
Clearing is the process of determination of obligations, after which the obligations are discharged by settlement.
NSCCL has two categories of clearing members: trading members and custodians. The trading members can pass on its obligation to the custodians if the custodian confirms the same to NSCCL. All the trades whose obligation the trading member proposes to pass on to the custodian are forwarded to the custodian by NSCCL for their confirmation. The custodian is required to confirm these trade on T + 1 days basis.
Once, the above activities are completed, NSCCL starts its function of Clearing. It uses the concept of multi- lateral netting for determining the obligations of counter parties. Accordingly, a clearing member would have either pay-in or pay-out obligations for funds and securities separately. Thus, members pay-in and pay-out obligations for funds and securities are determined latest by T + 1 day and are forwarded to them so that they can settle their obligations on the settlement day (T+2)
STRAIGHT THROUGH PROCESSING
Straight Through Processing (STP) is generally understood to be a mechanism that automates the end to end processing of transactions of financial instruments.
It involves use of a system to process or control all elements of the work flow of a financial transaction, what are commonly known as the Front, Middle, Back office and General Ledger. In other words, STP allows electronic capturing and processing of transactions in one pass from the point of order origination to final settlement.
It involves use of a system to process or control all elements of the work flow of a financial transaction, what are commonly known as the Front, Middle, Back office and General Ledger. In other words, STP allows electronic capturing and processing of transactions in one pass from the point of order origination to final settlement.
Advantages of Straight Through Processing
Reduced risk
Automation of manual process minimizing errors
Greater transparency with clear audit trail
Increases competitive advantage of our markets
Eliminates paper work and minimizes manual intervention
Enables increased cross border trading (FII trades)
Improved operational efficiency in handling larger volumes
Facilitates movement towards shorter settlement cycles (T+1)
Timely settlement of trades and instructions
Lower cost per trade
WHAT IS RISK MANAGEMENT
The broker shall ensure that trading limits/ exposure limits/ position limits are set for all DMA clients based on risk assessment, credit quality and available margins of the client. The broker system shall have appropriate authority levels to ensure that the limits can be set up only by persons authorized by the risk / compliance manager. The broker shall ensure that all DMA orders are routed through electronic/automated risk management systems of the broker to carry out appropriate validations of all risk parameters including Quantity Limits, Price Range Checks, Order Value, and Credit Checks before the orders are released to the Exchange
