Offline Monitoring Archives

Settlement Guarantee Mechanism

17th February 2019 by stocksbaazigar

The concept of guaranteed settlements has completely changed the way market safety is perceived. It has eliminated the counterparty risk of trading on the Exchange. The market has full confidence now that settlements will take place in time and will be completed irrespective of possible defaults by isolated trading members. In this post we will learn about the Settlement Guarantee Mechanism. Settlement Guarantee Fund A large Settlement Guarantee Fund provides the cushion for any residual risk left after the fine-tuned risk management system. The Settlement Fund is an important element in facilitating the settlement process. The Fund operates like a self-insurance mechanism and is funded through the contributions made by trading members, transaction charges, penalty amounts, fines etc. recovered by NSCCL. A part of the Cash Deposit and the entire security of every clearing member with the Exchange has been converted into an initial contribution towards the Settlement Guarantee Fund. There is a provision that as and when volumes of business increase, members may be required to make additional contributions allowing the fund to grow along with the market volumes. Direct Pay-out of Securities On the pay-out day, pay-out directly goes to the Investor’s account. NSCCL has a system of directly pay-out of securities to Investor’s account in place. The trading Member/clearing Member indicates the beneficiary account to which the securities payout is made by the way of file upload. This system is applicable for both the depositories. In case of any wrong information provided by the trading member, the pay-out goes to the pool account of the trading member. No-delivery period To ensure that investor’s entitlement for the corporate benefits is clearly determined, the exchange sets up a ‘no-delivery period’ for the security in which book closure or a record date is announced by a company for corporate actions other than AGM, EGM, Dividend, Bonus etc. During this period, trading is permitted in the security under consideration but all the trades are settled only after the no-delivery period is over. Penalty The clearing corporation levies penalties on trading members for non-compliances and defaults like: Fund Shortages Securities Shortages Margin Shortages Security Deposit Shortages Client Code Modification Non-Acceptance/Rejection/ Allocation of Institutional trades Ineligible client in Inter-institutional deals Others. Investigation and Inspection As per the regulatory requirement, a minimum of 20% of the active trading members are to be inspected every year by Exchanges. Usually more members than regulatory requirements are scrutinized every year to verify the level of compliance with various rules, byelaws and regulations of the exchange. We have seen how the inspection process or Offline Monitoring takes place in the previous post ‘Online and Offline Monitoring‘ in this blog.

Online and Offline Monitoring

16th February 2019 by stocksbaazigar

In Indian share market Harshad Mehta and Ketan Parekh Scams have forced Stock Exchanges to be very stringent about their rules and regulations. To protect the interest of Investor, maximum use of technology and minimum interference of human was needed. Through their NEAT and BOLT screen-based trading system NSE and BSE respectively, achieved this to some extent. But apart from this there was a strong need to put an Online as well as Offline Monitoring system to keep track on the activities of Trading Members. Cases of Insider Trading, Share Price Manipulations, Operator-driven scrips have always created risk and posed new challenges in front of SEBI. We will see how these Monitoring systems are used in Risk Management. Online Monitoring NSCCL has put in place an on-line monitoring and surveillance system whereby exposure of the members is monitored on a real-time basis. A system of alerts has been built in so that both member and NSCCL are alerted as per pre-set levels (reaching 70%, 85%, 90%,95%, and 100%) when the members approach their allowable limits. The system enables NSCCL to further check the micro-details of member’s positions, if required and take proactive active action. The on-line surveillance mechanism also generates various alerts/reports on any price/volume movement of securities not in line with past trend/patterns. For this purpose the exchange maintains various databases to generate alerts. Alerts are scrutinized and if necessary taken up for follow up action. Open positions of securities are also analyzed. Besides this, rumors in the print media are tracked and where they are price sensitive, companies are contacted for verification. Replies received are informed to the members and the public. Offline Monitoring Off-line surveillance activity consists of inspections and investigations. As per regulatory requirement, a minimum of 20% of the active trading members are to be inspected every year to verify the level of compliance with various rules, bylaws and regulations of the Exchange. Usually, inspection of more members than the regulatory requirement is undertaken every year. The inspection verifies if investor interests are being compromised in conduct of business by the members. The investigation is based on various alerts, which require further analysis. If further analysis reveals any suspicion of irregular activity which deviates from the past trends/patterns and concentration of trading at 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 suspicions of possible regular activity across exchanges and/or possible involvement of clients, then the same is informed to SEBI.