settlement Archives - Stocksbaazigar

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.

Clearing and Settlement

8th February 2019 by stocksbaazigar

Clearing refers to the process of comparing trades before settlement date or the determination of the net obligation of the broker participants (for both securities and cash) The settlement process refers to the exchange of cash and securities on the contractual settlement date. The settlement date can be agreed upon at trade execution or can be prescribed by local trading conventions Clearing and Settlement mechanism in India has witnessed several innovations wiz State-of-art information technology, Compression of Settlement Cycle, Dematerialization and electronic transfer of securities, Securities lending and borrowing, Professionalization of trading members, Fine-tuned risk management system, Emergence of clearing corporations to assume counterparty risk etc. Transaction Cycle A transaction cycle depicts the steps followed by a client in order to execute a trade wherein a buy order matches with a sell order. Step 1: Decision to trade Step 2: Placing Order Step 3: Trade Execution Step 4: Clearing of trades Step 5: Settlement of trades Step 6: Funds/Securities DAY Timings Job Performed T (Trade Day) 9:55 a.m to 3:30 p.m Buy/Sell securtities T+1 By 11:00 a.m. Confirmation of all trades By 1:30 p.m. Processing and downloading of files to brokers/custodians T+2 By 11:00 a.m. Pay-in of securities and funds By 1:30 p.m. Pay-out of Securities and Funds Why Clearing? Clearing is necessary for the matching of all buy and sell orders in the market. It provides smoother and more efficient markets. Parties can make transfers to the clearing corporation, rather than to each individual party with whom they have transacted. The agency reports discrepancies to traders in case the reports do not match, who then try to resolve them. It ensures that trades are settled in accordance with market rules by managing past trading and pre-settlement credit exposures. Settlement Settlement takes place once clearing process in 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. The timing of payment will depend on the settlement time of the transaction. The buyer must make payment within the settlement period, while the seller must deliver the purchased security within this period. Core Functions Involved in Settlement Process Trade recording: Key details about the trades Trade Confirmation: Counterparties agree upon the terms of trade Determination of Obligation: determine what they owe/dues Pay-in of Funds and Securities: Funds/securities are brought in to NSCCL/CH Pay-out of funds and Securities: Release of pay-out out of funds/securities Risk Management: For an efficient settlement system.

Auction in Indian Stock Exchanges

7th February 2019 by stocksbaazigar

What are Auctions? Auctions are initiated by the Exchanges on behalf of trading members for settlement-related reasons. If a Trade happens today (T-day), the settlement of shares takes place on (T+2) days. In some cases, due to some reasons, the obligations of delivery of shares fails. The main reasons are shortages, bad deliveries, and objections. Normally during short-selling position taken with a delivery option if the trader fails to buy-back the equal quantity of shares to square-off the position his broker will take part in Auction on behalf of him to settle the positions. The failure of the seller to deliver the shares to the buyer on T+2 obligated is called short delivery. The auction is conducted every day from 2:00 p.m. to 2:45 p.m. The exchange does not specify any ‘auction price’. It allows the participants of the auction to sell shares within a specified range. This range is normally +/-20% of the T+1 day closing Price. i.e. if Share closed on Rs. 100 on T+1 day then Upper limit of the range will be ‘100+ (20% of 100) = Rs 120’ and the lower price of the range will be ‘100 – (20% of 100) = Rs. 80’. In this case, orders will be placed between 80-120 range only. There are three types of participants on the auction market: Initiator, Competitor and Solicitor. Types of Participants in Auction Initiator: The party who initiates the auction process is called an initiator. Competitor: The party who enters on the same side as of the initiator is called a competitor. Solicitor: The party who enters on the opposite side as of the initiator is called a solicitor. Auction Process The trading members can participate in the Exchange initiated auctions by entering orders as a Solicitors. e.g. If the exchange conducts a Buy-in auction as an initiator while the trading members entering sell orders are called solicitors. When the auction starts, the competitor period for that auction also starts. Competitor period is the period during which competitor order entries are allowed. Competitor orders are the orders which compete with the initiator’s order. i.e. if the initiator’s order is a buy order, then all the buy order for that auctions other than the initiator’s order are competitor orders. And if the initiator’s order is a sell order then all the sell orders for that auction other than initiators order are competitor orders. After the competitor period ends, the solicitor period for that auction starts. Solicitor period is the period during which solicitor order entries are allowed. Solicitor orders are the orders which are opposite to the initiator order i.e. if the initiator order is a buy order, then all the sell orders for that auction are solicitor orders and if the initiator order is sell order, then all the buy orders for that auction are solicitor orders. After the solicitor period, order matching takes place. The system calculates the trading price for the auction and all possible trades for the auctions are generated at the calculated trading price. After this the auction is said to be complete. Competitor period and solicitor period for any auction are set by the Exchange. Entering Auction Orders: Auction order entry allows the user to enter orders into auctions that are currently running. – Auction Order Modification: The user is not allowed to Modify any auction orders. Auction Order Cancellation: The user can cancel any solicitor order placed by him in any auction provided the solicitor period for that auction is not over. Auction Order Matching: When the solicitor period for an auction is over, auction order matching starts for that auction. During this process, the system calculates the trading price for the auction based on the initiator order and the orders entered during the competitor and the solicitor period. At present for Exchange initiated auctions, the matching takes place at the respective solicitor order prices The rules for matching of auctions are similar to that of the regular lot book except for the following points: Auction order matching takes place at the end of the solicitor period for the auction. Auction matching takes place only across orders belonging to the same auction. All auction trades take place at the auction price.