Back office operations Intro The operations division is also known as the 'back office'.

Unlike the traders, sales people, capital markets bankers and corporate financiers of the 'front office', operations staff dont liaise with customers to generate revenues and profits for the bank. Instead, the division is a support function operations professionals support people in the front office to make sure everything works smoothly and the institute runs smoothly on the surface. The operations division is at the core of processing every transaction at the bank. It links all the control processes to help protect the institutes operations and reputation. Operations staff work closely with the other divisions trading, sales, technology, market risk, credit, compliance, tax and legal as well as external clients to help facilitate business and provide guidance and direction, especially with new products. All institutes have back-office support teams. Back-office functions are so broad that operations staff typically specialise in only one of these areas. Typical functions include settlement of securities and derivatives including Forex and commodities, reconciliations, issuance of new securities through Initial Public Offerings (IPOs), and processing of asset servicing. At its centre is the core function of clearing and settling trades. Clearing trades involves looking at the records made by the investors and traders when they buy and sell shares or other financial products, and checking that they match the records kept by the people from whom or to whom the shares were bought or sold (the counterparties). People who work in settlements 'settle' trades or ensure the stocks or shares bought and sold by the banks traders are exchanged for the correct amount of money. Settlements covers everything from preparing the documentation required for a sale, to making sure the bank has been paid for all the shares it has sold and bought.

Indian Financial System The financial system comprises a variety of intermediaries, markets, and instruments. It provides the principal means by which savings are transformed into investments. Given its role in the allocation of resources, the efficient functioning of the financial system is critical to a modern economy. A conceptual Framework of how the financial system works:-

The Financial System

The financial system performs the following interrelated functions that are essential to a modern economy: It provides a payment system for the exchange of goods and services. It enables the pooling of funds for undertaking large-scale enterprises. It provides a mechanism for managing uncertainty and controlling risk. It generates information that helps in coordinating decentralized decision making. It helps in dealing with the incentive problem when one party has an information advantages.

What Is A Stock Exchange? A stock exchange is simply a market that is designed for the sale and purchase of securities of corporations and municipalities. This means that a stock exchange sells and buys stocks, shares, and other such securities. In addition, the stock exchange sometimes buys and sells certificates representing commodities of trade. At first, stock exchanges were completely open. Anyone who wished to buy or sell could do so at a stock exchange. However, to make stock exchange more effective, membership became limited to those in clubs and other associations. Today, professionals who have a seat at the exchange are the people who trade at the exchange. Stock markets affect the entire economy and encourage investment. In the United States, larger cities including Boston, New York, Philadelphia, Denver, Chicago, Los Angeles, and San Francisco all have stock exchanges. Major cities across the world also have exchanges of their own. Not all stocks are listed on exchanges. Some are sold on the so-called overthe-counter market, which means that they are sold and bought directly by brokers. This method of buying became especially important during the early 1980s. Today, online stock exchange is even more covalent. Thanks to the growth of the Internet almost anyone can sell and buy stocks online. Investors simply tell their banks or investment brokers online what they wish to trade and when and the brokers hired by the online trading system buy or sell stocks for the client electronically.

How Does A Stock Exchange Work? Traditionally The buying and selling of stocks at the exchange is done on an area which is called the floor. All over the floor are positions which are called posts. Each post has the names of the stocks traded at that specific post. If a broker wants to buy shares of a specific company they will go to the section of the post that has that stock. If the broker sees at the price of the stock is not quite what the broker is authorized to pay, a professional called the specialist may receive an order. The specialist will often act as a go-between between the seller and buyer. What the specialist does is to enter the information from the broker into a book. If the stock reaches the required price, the specialist will sell or buy the stock according to the orders given to them by the broker. The transaction is then reported to the investor. If a broker approaches a post and sees that the price of the stock is what they are authorized to pay, the broker can complete the transaction themselves. As soon as a transaction occurs, the broker makes a memorandum and reports it to the brokerage office by telephone instantly. At the post, an exchange employee jots down on a special card the details of the transaction including the stock symbol, the number of shares, and the price of the stocks. The employee then puts the card into an optical reader. The reader puts this information into a computer and transmits the information of the buy or sell of the stock to the market. This means that information about the transaction is added to the stock market and the transaction is counted on the many stock market tickers and information display devices that investors rely on all over the world. Today, markets are instantly linked by the Internet, allowing for faster exchange.

Working of the Stock Exchange.

Buyer-A/ Seller-A

Depository Participant

Broker- A

NSE

NSDL

Broker-B

Buyer-B/Seller-B Client

Depository Participant Settlement of money

Settlement of shares Detailed explanation with example:-

Buyer-B of Broker-B purchases 100 shares Reliance from Broker-A at the same time Seller-A sells 100 shares of Reliance to Broker B through Broker-A then following procedure take place B pays to broker-B the amount due on the shares purchased by him. Broker-B pays the settlement amount to NSE (Funds Pay in) NSE pays the amount to the Seller Broker-A Then Seller Broker-A pays the amount to seller-A (Funds Pay out) Simultaneously Seller-A delivers 100 Reliance to Broker-A in his depository account (Shares Pay in) Broker-A delivers the shares to NSDL through his Depository Participant. NSDL then gives the shares to broker-b Finally Broker-B delivers the shares to Buyer-B (Shares Payout)

An investor who wants to hold his securities in electronic form he has to approach a Depository Participant and through him open an account at NSDL. After getting Client I.D. no. from NSDL then client goes to a registered broker of NSE/BSE for investing in the shares. The client gives the order to the operator seating on the NEAT software (National Exchange for Automated Trading) for particular scrip at a specific price when the bid matches on the screen the confirmation tag blinks with the scrip ISIN no.(International Securities Identification Number) for which he has to take the delivery and make the payment on T+2 basis, if he doesn t make the payment it goes to Auction and he has to pay the penalty and the auction price for the shares traded. Existing Depositories in India Presently there are two depositories in the country, namely National Securities Depositories Limited (NSDL) and Central Depositories Services Limited (CDSL). NSDL was set up as the first depository company in the country; it has been sponsored by the Unit Trust of India, NSE, State Bank of India, HDFC Bank and City Bank. Its performs the following functions through depository participants enables the surrender and withdrawal of securities to, and from, the depository; it maintains investors holdings in the electronic form; effects settlement of securities traded on the exchanges; it carries out settlement of trades not done on the stock exchange (off market trades); transfers of securities; electronic credit in public offerings of companies; receipt of non-cash corporate benefits like bonus, rights, and so on in electronic form; Stock lending and borrowing. The Mumbai Stock Exchange in association with the Bank of Baroda, State Bank of India and HDFC Bank have promoted CDSL as a secondary depository in India for dealing in securities, in the electronic form, by the name of Central Depository Services (India) Limited (CDSL). The main objectives are as to accelerate the growth of scripless trading; to make a major trust in the individual investors participation in the depository, to create a competitive environment which will be responsive to the user s interests and demands, to enhance liduidity.

Role and Functions of Stock Market The functions of the stock exchange are as follows: 1. The stock exchange provides a market place for purchase and sale of securities. 2. Ensures the free transferability of securities. 3. Stock exchange provides readily available buyers for corporate stocks. 4. Stock Exchange provides readily available seller for the interested investors.

5. It mobilizes the savings from the household sector to the investment in the corporate sector. 6. It helps the investor in analyzing the enterprises on the basis of growth prospects, returns, risk with the information about factors affecting these conditions like industrial policies, price controls, foreign exchange regulations, etc., 7. The members of the Stock Exchange also assist in regulating and floating a new issue in the markets. They also act as the under-writers and brokers, all over India. 8. Stock Exchange provides valuable data and information about the prices of the securities on micro (company) and macro level (market level). 9. Stock Exchange has introduced various laws to keep a check on the speculative activities in the markets and possesses the power and authority to prevent/ penalizes excessive speculation, from either party, in order to ensure disciplined trading. 10. It also provides a market place for the Government Securities

Safety of the Market: A major objective of BSE is to promote and inculcate honourable and just practices of trade in securities transactions, and to discourage malpractices. The surveillance function at BSE has assumed greater importance over the last few years. It has a dedicated Surveillance Department to keep a close, and a daily, watch on the price movement of scrips, detect market manipulations like price rigging, etc., monitor abnormal prices and volumes which are not consistent with normal trading pattern and monitor the Members' exposure levels to ensure that defaults do not occur. This Department, which is headed by a General Manager, reports directly to Managing Director. As per the guidelines issued by SEBI, except for scrips on which derivative products are available and are part of indices on which derivative products are available,a daily Circuit Filter of 20% is applied on all scrips.Circuit filters ensures that the price of a scrip cannot move upward or downward beyond the limit set for the day.BSE has imposed dummy circuit filters to avoid freak trade due to punching errors by the Trading Members. The abnormal variation in the prices as well as the volumes of the scrips are scrutinised and appropriate actions are taken. The scrips which reach new high or new low and companies which have high trading volumes are watched closely. A special emphasis is laid on the newly listed scrips.

In case certain abnormalities are noticed, the circuit filters are reduced to make it difficult for the price manipulators to increase or push down the prices of a scrip within a short period of time. BSE imposes special margins in scrips where it suspects an attempt to ramp up the prices by creating artificial volumes. BSE also transfers the scrips for trading and settlement to the trade-totrade category which leads to giving/taking delivery of shares on a gross level and no intraday/settlement netting off/squaring off facility is permitted. If abnormal movements continue despite the aforesaid measures, BSE suspends the trading in the scrip. Detailed investigations are conducted in cases where price manipulation is suspected and disciplinary action is taken against the concerned Members. BSE has an On-line Real Time (OLRT) Surveillance System, which has been in operation since July 15, 1999. Under this system, alerts are generated on-line, in real time during the trading hours, based on certain preset parameters like the price and volume variation in scrips, a Member taking unduly large positions not commensurate with their financial position or having concentrated positions in one or more scrips. This system integrates several databases like company profiles, Members' profiles and historical data of turnover and price movement in scrips, Members' turnovers, their pay-in obligations, etc.

Back office functioning

This report is about the study undertaken by me during a period of two months for my summer project in Pune Stock Exchange. The Back office function acts as a back bone of any share broking firm as the work which the personnel in back office has to perform is very crucial and important for the client as well as the firm. Any mistake from the personnel might become a liability for the firm, for e.g. if there is short delivery or pay in of clients share then for those shares auction takes place for which they have to pay the price for the same. Hence the back office function calls for the full concentration level of the personnel while doing his or her work. If the back office section detects any error it should draw the attention of the higher authority for the corrective action. Basically the back office function includes responsibilities like transaction processing, settlement and other administration functions. So the key result activity in a share broking firm is the back office function which operates through different department like Crd department, Delivery department, Accounts Department, Compliance department etc.

Departments 1. Client registration Department (CRD) In order to trade in the market the client has to fill up the agreement between the Client-Broker-Sub broker which is know as tripartite agreement and also know your client forms with necessary requirement attached to it, has to been send to CRD. In the mean while the client or sub broker has to feed the all information in masters and has to submit it in s/w which can viewed by the client broker and sub brokers end. After receiving the forms the employees in the CRD verifies it and checks with the master, and everything is matched, it gives instructions for the activation of the client to the surveillance department. And once it get activated CRD informs to client by putting the details in the ftp site which can be viewed at their end and can start trading. And if the details do not match or any particular attachment is not there then they inform through ftp site where the client and sub broker can view the current status. If any changes has to made like change in name or address or in brokerage they have to inform to CRD and they get it changed. 2. Delivery and Accounts Department Basically the employees in the Delivery department have to look after the pay in and pay out of shares and Accounts department has to look after the pay in and pay out of funds. a. Pay in of shares Now a days pay in of the shares is done automatically which is known auto delivery out. NSE/BSE has the record of how much pay in of shares is due from the seller s broker. The bank in which the broker has his account, which is only for clearing member, the download of auto delivery out is taken through the NSE s site. Then the broker gets the print out of the delivery out report which shows whether nsdl/cdsl has received the pay in correctly or not. After confirming it from the bank the shares are sent from pse account to nse/bse and confirm the pay in. Suppose if they are any short delivery of shares then nse/bse gives debit to the pse account and similarly brokers debit it to sub brokers/clients account and then nse/bse can charge penalty for short pay in. b. Pay out of shares and funds When shares are purchased by the client then he gives money to sub broker which he delivers to pse and pse sends to nse/bse as funds pay in against which nse/bse gives payout of funds and also gives delivery of shares to pse and in return pse gives the pay out of shares and payout of funds to the respective sub brokers at present T+2 basis, which means the day of trade plus two days within which the

pay in and pay out of shares and funds should take place simultaneously. c. Intersettlement transaction Intersettlement transaction are the necessary adjustments between the broker and the client for which client has to give request to the broker, for e.g. if the client has sold 20 share of reliance in settlement number 154, but if the client request to broker/ sub broker to adjust this pay in against the payout in settlement number 158 then it is called as inter settlement transaction. d. Cash management and transfer of funds Cash/ funds is the lifeblood of any organization so management of cash and transfer of funds form a very important aspect of the accounts department. This includes constant check and reconciliation of the bank account of the sub broker. e. Preparation Bank Reconciliation statement Bank reconciliation state is very important as it helps the accountant to understand the balance of cash in the respective bank account and if there is any difference between in balance as per the sub brokers book and as per our books it has to be rectified immediately and should be informed immediately. There could be many reasons because of which there can be indifference in cash and bank balances and doing bank reconciliation statement can rectify these difference. f. Preparing the cash statement This statement gives the details of the transactions of previous days. It shows all the debits and credits given to each and every client, margin from the sub broker, net balances, net stock payment(normal/auction) and net stock receivable(normal/auction) g. Checking the Daily Funds Statements Daily funds give the details of pay in and pay out of funds and also show whether it was normal or auction. This report has to be checked by the accountant and find whether there is any short delivery, if yes then get the short delivery report from the delivery department. h. Undertake the work of recovery as well The job of recovery is very is very difficult and this is one of the important functions of the accounts personnel for this he has to be very shrud person and see that the job is done. 3. Compliance Department Compliance has acquired a lot of importance these days as there are penalties if you fail to comply as per the requirement of nse. For those purpose of compliance pse has to submit a compliance report to nse s

inspection and investigation department signed by the Managing director on the behalf of the company under the common seal. They have to inform to sub broker regarding the inspection or meetings which are duly held like AGM, has to prepare minutes of the meeting, has to inform any changes in rules, regulations and laws etc 4. Surveillance Department As the securities transactions are prone to verity of manipulations, the nse has instituted a strong surveillance mechanism to protect market integrity. It includesOnline monitoring - The National Securities Clearing Corporation Ltd. has in place an online monitoring and surveillance system whereby exposure of the member is monitored on a real time basis. A system of alerts has been built in so that both the member and NSCCL are altered as per pre-set levels (reaching 70, 85, 95, and 100 percent) when the members approach their allowable limits. The system enables the NSCCL to further check the micro details of members positions, if required, and take proactive action. The online surveillance mechanism also generates various alerts/ reports on any price/volume movement of securities not in line with past trends/patterns. For this purpose, the nse has put in place a system that generates alerts. Alerts are scrutinized and are taken up for follow up action. Open positions of securities are also analyzed. Besides this, rumours in the print media are tracked and, where they are sensitive, companies are contacted for verification. Replies are informed to the members and the public. Investigation and inspection As per regulatory requirements, a minimum of 10% of the active trading members are to be inspected every year to verify the level of compliance with various rules, byelaws and regulations of the nse. Usually, inspection of more members than the regulatory requirement is under taken every year. The inspection randomly verifies if investor interests are being compromised in the conduct of business by members. The investigation is based on various alerts which require further analysis. If the analysis suggest any possible irregular activity which deviates from trends/patterns and concentration of trading at the 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 possible irregular activity across the exchange and/ or possible involvement of clients, then the same is informed to the SEBI. 5. Depository participant (DP) Once the trade is done on the stock exchange, client/sub broker gets reports of their net obligation. A clearing member (CM) has to open a clearing and settlement of trades with a DP. On opening of such account an account, the depositories allots a number identified as CM- Business

partner- Id. The DP opens an account and the CM is allotted a number (Client ID). The delivery account consists of three parts pool a/c; delivery a/c; receipt a/c, to facilitate easy book keeping. The role of the pool account in clearing of securities is two fold- a.) the selling client of the CM transfers securities from his client account to the pool a/c of the CM before pay in and b.) after payout, the CM transfers securities(to the extent of his obligation to the clearing operation) from the pool a/c to the delivery a/c , before pay in. On pay in day the depository flushes out the securities in the delivery a/c and transfers the same to CC automatically. On pay out day, the CC transfers securities to the pool a/c (to extent of the net receipt) through the receipt a/c. This account can be used to trace the details of settlement-wise receipt into the clearing. On off market trades, these include trades where the seller and buyer deal directly with each other, without any intervention of the CC. The seller would give his DP a delivery instruction slip instructing him to debit his account with the transacted securities and the buyer would give his DP a receipt instruction slip to credit his account. Both the instructions would have the same execution date. The transaction would match at the depository, and credit and debit would be given by the DPs to their respective Client account.

Trading and General terms:

Listed Securities The securities of companies, which have signed the Listing Agreement with BSE, are traded as "Listed Securities". Almost all scrips traded in the Equity segment fall in this category. Permitted Securities To facilitate the market participants to trade in securities of such companies, which are actively traded at other stock exchanges but are not listed on BSE, trading in such securities is facilitated as " Permitted Securities" provided they meet the relevant norms specified by BSE Tick Size Tick size is the minimum difference in rates between two orders on the same side i.e., buy or sell, entered in the system for particular scrip. Trading in scrips listed on BSE is done with the tick size of 5 paise. However, in order to increase the liquidity and enable the market participants to put orders at finer rates, BSE has reduced the tick size from 5 paise to 1 paise in case of units of mutual funds, securities traded in "F" group and equity shares having closing price up to Rs. 15 on the last trading day of the calendar month. Accordingly, the tick size in various scrips quoting up to Rs.15 is revised to 1 paise

on the first trading day of month. The tick size so revised on the first trading day of month remains unchanged during the month even if the price of scrips undergoes a change. Computation Of Closing Price Of Scrips The closing price of scrips is computed by BSE on the basis of weighted average price of all trades executed during the last 30 minutes of a continuous trading session. However, if there is no trade recorded during the last 30 minutes, then the last traded price of scrip in the continuous trading session is taken as the official closing price. Basket Trading System BSE has commenced trading in the Derivatives Segment with effect from June 9, 2000 to enable investors to hedge their risks. Initially, the facility of trading in the Derivatives Segment was confined to Index Futures. Subsequently, BSE has introduced the Index Options and Options & Futures in select individual stocks. Investors in the cash market had felt a need to limit their risk exposure in the market to the movement in Sensex. With a view to provide investors the facility of creating Sensex-linked portfolios and also to create a linkage of market prices of the underlying securities of Sensex in the Cash Segment and Futures on Sensex, BSE has provided to the investors as well as to its Members a facility of Basket Trading System on BOLT with effect from August 14, 2000. In the Basket Trading System, the investors through the Members are able to buy/ sell all 30 scrips of Sensex in one go in the proportion of their respective weights in the Sensex. The investors need not calculate the quantity of Sensex scrips to be bought or sold for creating Sensex-linked portfolios and this function is performed by the system. The investors can also create their own baskets by deleting certain scrips from 30 scrips in the Sensex. Further, the investors can alter the weights of securities in such profiled baskets and enter their own weights. The investors can also select less than 100% weightage to reduce the value of the basket as per their own requirements. To participate in this system, the Members need to indicate the number of Sensex basket(s) to be bought or sold, where the value of one Sensex basket is arrived at by the system by multiplying Rs.50 to the prevailing Sensex. For example, if the Sensex is 15,000, the value of one basket of Sensex would be 15000 x 50= i.e., Rs. 7,50,000/-. The investors can also place orders by entering value of Sensex portfolio to be brought or sold with a minimum value of Rs. 50,000 for each order. The Basket Trading System provides the arbitrageurs an opportunity to take advantage of price differences in the underlying Sensex and Futures on the Sensex by simultaneous buying and selling of baskets comprising the Sensex scrips in the Cash Segment and Sensex Futures. This would provide a balancing impact on the prices in both cash and futures markets. The Basket Trading System thus meets the need of investors and also improves the depth in cash and futures markets. The trades executed under the Basket Trading System are subject to intra-day trading and gross exposure limits available to the Members. The VaR, MTM margins etc, as are applicable to normal trades in the Cash Segment, are also recovered from the Members.

Netting: Netting is the agreed offsetting of reciprocal obligations by trading partners or participants in a system, including the netting of trading obligations, for example, through a central counterparty, as well as agreements to settle instructions to transfer securities or fund assets on a net basis. The result is that delivery and payment obligations arising from trading are netted to reduce the number of settlement transactions.

Settlement Compulsory Rolling Settlement All transactions in all groups of securities in the Equity segment and Fixed Income securities listed on BSE are required to be settled on T+2 basis (w.e.f. from April 1, 2003). The settlement calendar, which indicates the dates of the various settlement related activities, is drawn by BSE in advance and is circulated among the market participants.

Under rolling settlements, the trades done on a particular day are settled after a given number of business days. A T+2 settlement cycle means that the final settlement of transactions done on T, i.e., trade day by exchange of monies and securities between the buyers and sellers respectively takes place on second business day (excluding Saturdays, Sundays, bank and Exchange trading holidays) after the trade day.

The transactions in securities of companies which have made arrangements for dematerialization of their securities are settled only in demat mode on T+2 on net basis, i.e., buy and sell positions of a member-broker in the same scrip are netted and the net quantity and value is required to be settled. However, transactions in securities of companies, which are in "Z" group or have been placed under "trade-to-trade" by BSE as a surveillance measure ("T" group) , are settled only on a gross basis and the facility of netting of buy and sell transactions in such scrips is not available.

The transactions in 'F' group securities representing "Fixed Income Securities" and " G" group representing Government Securities for retail investors are also settled at BSE on T+2 basis.

In case of Rolling Settlements, pay-in and pay-out of both funds and securities is completed on the same day.

Members are required to make payment for securities sold and/ or deliver securities purchased to their clients within one working day (excluding Saturday, Sunday, bank & BSE trading holidays) after the pay-out of the funds and securities for the concerned settlement is completed by BSE. This is the timeframe permitted to the Members to settle their funds/ securities obligations with their clients as per the Byelaws of BSE.

The following table summarizes the steps in the trading and settlement cycle for scrips under CRS :

DAY
T

ACTIVITY o o o Trading on BOLT and daily downloading of statements showing details of transactions and margins at the end of each trading day. Downloading of provisional securities and funds obligation statements by member-brokers. 6A/7A* entry by the member-brokers/ confirmation by the custodians. Confirmation of 6A/7A data by the Custodians upto 1:00 p.m. Downloading of final securities and funds obligation statements by members Pay-in of funds and securities by 11:00 a.m. and payout of funds and securities by 1:30 p.m. The member-brokers are required to submit the pay-in instructions for funds and securities to banks and depositories respectively by 10: 30 a.m. Auction on BOLT at 11.00 a.m. Auction pay-in and pay-out of funds and securities by 12:00 noon and 1:30 p.m. respectively.

T+1

T+2

T+3

o o

T+4

The pay-in and payout of funds and securities takes places on the second business day (i.e., excluding Saturday, Sundays and bank and BSE trading holidays) of the day of the execution of the trade.

The settlement of the trades (money and securities) done by a Member on his own account or on behalf of his individual, corporate or institutional clients may be either through the Member himself or through a SEBI registered custodian appointed by him/client. In case the delivery/payment in respect of a transaction executed by a Member is to be given or taken by a registered custodian, the latter has to confirm the trade done by a Member on the BOLT System through 6A-7A entries. For this purpose, the custodians have been given connectivity to the BOLT System and have also been admitted as clearing member of the Clearing House. In case a registered custodian does not confirm a transaction done by a Member within the time permitted, the liability for pay-in of funds or securities in respect of the same devolves on the concerned Member. The following statements can be downloaded by the Members in their back offices on a daily basis. h. Statements giving details of the daily transactions entered into by the Member.

i. Statements giving details of margins payable by the Member in respect of the trades executed by him. j. k. Statements of securities and fund obligation. Delivery/Receive orders for delivery /receipt of securities.

BSE generates Delivery and Receive Orders for transactions done by the Members in A, B1, B2 and F and G group scrips after netting purchase and sale transactions in each scrip whereas Delivery and Receive Orders for "T", "C" & "Z" group scrips and scrips which are traded on BSE on "trade-to-trade" basis are generated on a gross basis, i.e., without netting of purchase and sell transactions in a scrip. However, the funds obligations for the Members are netted for transactions across all groups of securities. The Delivery Order/Receive Order provides information like the scrip and quantity of securities to be delivered/received by the Members through the Clearing House. The Money Statement provides scrip wise/item wise details of payments/receipts of monies by the Members in the settlement. The Delivery/Receive Orders and Money Statement can be downloaded by the Members in their back office

Pay-in and Pay-out for 'A', 'B', 'T', 'C', "F", "G" & 'Z' Group of Securities The trades done on BOLT by the Members in all securities in CRS are now settled on BSE by payment of monies and delivery of securities on T+2 basis. All deliveries of securities are required to be routed through the Clearing House,

The Pay-in /Pay-out of funds based on the money statement and that of securities based on Delivery Order/ Receive Order issued by BSE are settled on T+2 day.

Demat pay-in The Members can effect pay-in of demat securities to the Clearing House through either of the Depositories i.e. the National Securities Depository Ltd. (NSDL) or Central Depository Services (I) Ltd. (CDSL). The Members are required to give instructions to their respective Depository Participants (DPs) specifying details such as settlement no., effective pay-in date, quantity, etc. Members may also effect pay-in directly from the clients' beneficiary accounts through CDSL. For this, the clients are required to mention the settlement details and clearing member ID 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 on 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 Members 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 ISINs. Members 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 accounts and Principal accounts maintained by the Members with the respective depositories.

Pay-in of Securities in Physical Form In case of delivery of securities in physical form, the Members are required 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. The data submitted by the Members on floppies is matched against the master file data on the Clearing House.If there is no discrepancy, the securities are accepted.

Funds Pay-in The bank accounts of Members maintained with the clearing banks, viz., Bank of India, HDFC Bank Ltd., Oriental Bank of Commerce., Standard Chartered Bank, Centurion Bank Ltd., Axis Bank Ltd., ICICI Bank Ltd, Indusind Bank Ltd., Union Bank of India and Hongkong & Shanghai Banking Corporation Ltd. are directly debited through computerized posting for their funds settlement obligations. In case of Members whose funds pay-in obligations are not cleared at the scheduled time, action such as levy of penalty and/or deactivation of BOLT TWSs , is initiated as per the prescribed penalty norms.

Securities Pay-out Demat securities are credited by the Clearing House in the Pool/Principal Accounts of the Members. BSE has also provided a facility to the Members 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. For this, the concerned Members are required to give a client wise break up file which is uploaded by the Members from their offices to the Clearing House. Based on the break up given by the Members, the Clearing House instructs the depositories, viz., CDSL & NSDL to credit the securities to the Beneficiary Owners (BO) Accounts of the clients. In case delivery of securities received from one depository is to be credited to an account in the other depository, the Clearing House does an inter-depository transfer to give effect to such transfers.

In case of physical securities, the Receiving Members are required to collect the same from the Clearing House on the pay-out day.

Funds Payout The bank accounts of the Members having pay-out of funds are credited by the Clearing House with the Clearing Banks on the pay-in day itself 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 on the trading day.

Risk Management

Cash Market The expansion of BOLT across the country has led to a significant increase in volumes and liquidity. This has also consequently increased the risk of default by the Members in meeting their settlement obligations. BSE has initiated several risk management measures in order to maintain the safety of the market and to avert defaults by the BSE Members in meeting their payment and delivery obligations.

Total Liquid Assets The core of the risk management system is the liquid assets deposited by the Members with BSE. These liquid assets cover the following five requirements:

Base Minimum Capital (BMC)

All Members are required to maintain a BMC of Rs.10 lakhs with BSE in the prescribed manner at all times. The composite corporate Members are required to maintain BMC in multiple of the membership rights held by them. The BMC, as prescribed by SEBI, is required to be kept in the form of cash (minimum 12.5%), Fixed Deposit Receipt(s) or Bank Guarantee(s) issued by bank(s) (minimum 37.5%) and balance in the form of eligible shares. The eligible shares for the purpose of the securities portion of the BMC are A and B1 group securities forming part of Group I classified as per the parameters of volatility and liquidity as stipulated in SEBI circular No. MRD/DoP/SE/Cir07/2005 dated February 23, 2005. BMC is not available for adjustment towards margins.

Additional Capital a. Members are also allowed to deposit Additional Capital (AC) over and above the BMC with BSE as follows :

(Liquid Assets) : Cash Equivalent.

Particulars
(i) Cash (ii) Bank Fixed Deposit Receipts ( FDRs ). iii) Bank Guarantee (iv) Securities of the Central Government * . (v) Units of liquid Mutual Fund (or) Govt. Sec. Mutual Fund (by whatever name called which invests in government securities) *.

Other Liquid Assets - Non-Cash Component

(Total of Other Liquid Assets should not exceed total of Cash Equivalent) :
Particulars
Non-Cash equivalent : (i) Liquid (Group-I) Equity Shares (as per the criteria for classification of scrips on the basis of liquidity). (Only A and B1 group securities forming part of such Group I) (ii)Mutual Fund units (other than those listed under cash equivalent). *

Cash equivalents should be at least 50% of the liquid assets. This implies that Other Liquid Assets in excess of the total Cash Equivalents is not regarded as part of the Total Liquid Assets.

b. MTM (Mark-To-Market) Losses: Mark-to-market losses on outstanding settlement obligations of the Member. c. VaR Margins: Value at risk margins to cover potential losses for 99% of the days.

d. Extreme Loss Margins: Margins to cover the expected loss in situations that lie outside the coverage of the VaR margins. e. Base Minimum Capital: Capital required for all risks other than the market risk (for example, operational risk and client claims). f. Special Margin : Special margin collected as a surveillance measure.

Members are required to maintain the liquid assets (collateral) to cover all the above five requirements. There are no other margins in the risk management system. 1. Single Trade 2. Cumulative Trades for the Day Immediately upon the execution of the order where the traded quantity, either buy or sell ,on account of any trade is more than 0.5% of the number of equity shares of the company listed on BSE. Within one hour from the closure of the trading hours, where the cumulative quantity traded under any single client code on that day either purchase or sale is more than 0.5% of the number of equity shares of the company listed at BSE.

The valuation of shares deposited by the Members with BSE is done on a daily basis, and a hair-cut equivalent to the respective VaR of individual scrip is applied i.e., only the residual value of eligible shares deposited is considered for the purpose of evaluation of capital(collateral) deposited by the Members with BSE.. The eligible shares deposited by the Members towards BMC are accepted by BSE in demat form only.

The cash can be deposited by the Members towards capital by submitting instructions to their clearing banks to debit their bank accounts and credit the amount to BSE's account.

As regards the Fixed Deposit Receipts (FDRs) of banks, the duly discharged FDRs are required to be submitted by the Members to BSE in the name of " Bombay Stock Exchange Ltd. A/c trade name of the Member" issued by any Mumbai-based branch or payable at any Mumbai-based branch of any scheduled commercial or co-operative bank.

The bank guarantees submitted by the Member towards the capital have to be in the approved format in favour of BSE either issued or payable by any Mumbai-based branch of a scheduled commercial bank only. However, in case FDRs/ bank guarantees are issued by the outstation branches of scheduled commercial banks (i.e., branches outside Mumbai), the payment of the proceeds on encashment of FDRs and invocation of bank guarantees by BSE has to be assured by a Mumbai-based branch of the concerned issuing bank.

Liquidity Categorization of Securities The securities are classified into three groups based on their liquidity:
Group Trading Frequency (over the previous six months see Note A)
At least 80% of the days At least 80% of the days Less than 80% of the days

Impact Cost (over the previous six months see Note A

Less than or equal to 1% More than 1% N/A

Liquid Securities (Group I) Less Liquid Securities (Group II) Illiquid Securities (Group III)

The trading frequency and impact cost is calculated on the 15th of each month on a rolling basis considering the previous six months for impact cost and previous six months for trading frequency. On the basis of the trading frequency and impact cost so calculated, the securities move from one group to another group from the 1st of the next month.

Categorisation of Newly-listed Securities

For the first month and till the time of monthly review as mentioned above, a newly listed stock is categorised in that group where the market capitalization of the newly listed stock exceeds or equals the market capitalization of 80% of the stocks in that particular group. Subsequently, after one month, whenever the next monthly review is carried out, the actual trading frequency and impact cost of the security is computed, to determine the liquidity categorization of the security.

In case any corporate action results in a change in ISIN, the securities bearing the new ISIN is treated as newly listed scrip for group categorization.

Calculation of mean impact cost:

The mean impact cost is calculated in the following manner:

1.Impact cost is calculated by taking four snapshots in a day from the order book in the past six months. These four snapshots are randomly chosen from within four fixed ten-minutes windows spread through the day.

2.The impact cost is the percentage price movement caused by an order size of Rs.1 lakh from the average of the best bid and offer price in the order book snapshot. The impact cost is calculated for both, the buy and the sell side in each order book snapshot.

Dissemination of Information The lists of securities forming part of groups I, II and III are disseminated on the BSE website on a monthly basis.

Margins In order to contain the risk arising out of transactions entered into by the members in various scrips either on their own account or on behalf of their clients, BSE has a well designed risk-management

system which inter-alia, includes collection of margins from the Members. BSE accordingly imposes various kinds of margins on the Members based on their outstanding positions in the market. The margining system followed by BSE is described below :

Computation of Margins For securities that have been listed for less than six months, the trading frequency and the impact cost is computed using the entire trading history of the scrip.

VaR Margin As mandated by SEBI, the Value at Risk (VaR) margining system, which is internationally accepted as the best margining system, is applicable on the outstanding positions of the Members in all scrips. a. The VaR Margin is a margin intended to cover the largest loss that can be encountered on 99% of the days (99% Value at Risk). For liquid stocks, the margin covers one-day losses while for illiquid stocks, it covers three-day losses so as to allow the Exchange to liquidate the position over three days. This leads to a scaling factor of square root of three for illiquid stocks.

For liquid stocks, the VaR margins are based only on the volatility of the stock while for other stocks, the volatility of the market index is also used in the computation. Computation of the VaR margin requires the following definitions:

Scrip sigma means the volatility of the security computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.

Scrip VaR means the higher of 7.5% or 3.5 scrip sigma.

Index sigma means the daily volatility of the market index (S&P CNX Nifty or BSE Sensex) computed as at the end of the previous trading day. The computation uses the exponentially weighted moving average method applied to daily returns in the same manner as in the derivatives market.

Index VaR

means the higher of 5% or 3 index sigma. The higher of the Sensex VaR or Nifty VaR would be used for this purpose. The VaR Margins are specified as follows for different groups of stocks:
Liquidity Categorization
Liquid Securities (Group I) Less Liquid Securities (Group II)

One-Day VaR
Scrip VaR Higher of Scrip VaR and three times Index VaR

Scaling factor for illiquidity

1.00 1.73 (square root of 3.00)

VaR Margin
Scrip VaR Higher of 1.73 times Scrip VaR and 5.20 times Index VaR 8.66 times Index VaR

Illiquid Securities (Group III)

Five times Index VaR

1.73 (square root of 3.00)

Collection of VaR Margin : a. The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the Member at the time of trade. b. The VaR margin is collected on the gross open position of the Member. The gross open position for this purpose is the gross of all net positions across all the clients of a Member including his proprietary position. c. d. For this purpose, there would be no netting of positions across different settlements. Dissemination of Information :

The VaR amount applicable in respect of the scrips is disseminated on the BSE website on a daily basis.

Extreme Loss Margin : The term Extreme Loss Margin replaces the terms "exposure limits" and "second line of defense" that have been used hitherto. It covers the expected loss in situations that go beyond those envisaged in the 99% value at risk estimates used in the VaR margin. e. The Extreme Loss Margin for any stock is higher of: o o 5%, and 1.5 times the standard deviation of daily logarithmic returns of the stock price in the last six months. This computation is done at the end of each month by taking the price data on a rolling basis for the past six months and the resulting value is applicable for the next month.

f. The Extreme Loss Margin is collected/adjusted against the total liquid assets of the member on a real time basis.

g. The Extreme Loss Margin is collected on the gross open position of the Member. The gross open position for this purpose means the gross of all net positions across all the clients of a member including his proprietary position. h. i. j. For this purpose, there is no netting of positions across different settlements. The Extreme Loss margin so collected is released alongwith the pay-in. Dissemination of Information :

The ELM amount applicable in respect of the scrips is also disseminated on the BSE website.

Special Margin : Special margin may be imposed by BSE from time to time on certain scrips as a surveillance measure and informed to the Members through notices.

Mark-to-Market Margin (MTM) : a. The MTM margin is collected on the gross open position of the Member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his proprietary position. For this purpose, the position of a client is netted across his various securities and the positions of all the clients of a Member is grossed. Further, there is no netting across two different settlements. b. There is no netting off the positions and setoff against MTM profits across 2 rolling settlements i.e. T day and T-1 day. However, for computation of MTM profits/losses for the day, netting or setoff against MTM profits is permitted.

Collection and Release of Margins All statements pertaining to daily margins viz., VaR, MTM, ELM and Special Margin computed by BSE on the outstanding positions of the Members are available for downloading by them in their backoffices at the end of the day.

VaR Margin The VaR margin is collected on an upfront basis by adjusting against the total liquid assets of the Member at the time of trade.

Extreme Loss Margin (ELM) The ELM is collected/ adjusted from the total liquid assets of the Member on a real time basis.

Mark-to-Market Margin (MTM) The MTM is computed after trading hours on T day on the basis of closing price, of that day. In case the security has not been traded on a particular day, the latest available closing price is considered as the closing price. MTM margins is also recomputed in respect of all the pending settlements on the basis of closing prices of T day and the difference due to increase/decrease in MTM margins on account of such recomputation is adjusted in the MTM obligation of the Member for the day. Such MTM is collected from the Members in the evening on the T day itself, first by adjusting the same from the available cash and cash equivalent component of the liquid assets and the balance MTM in form of cash from the Members through their clearing banks on the same day.

Special Margins The Special Margin as applicable is collected along with MTM from the Members, first, by adjusting the same from the available liquid assets and the balance Special Margin in form of cash from the Members through their clearing banks on the same day. Release of Margins The above-referred margins are released on completion of pay-in of the settlement o Fines / Penalty for Margin Default

Cases where there are insufficient balances in bank accounts of the Members at the time of debit of margin amounts payable in cash on the relevant day, are treated as margin defaults. The norms for levy of fines/ penalty for delay in clearance of margin obligations w.e.f. May 30, 2005 are as follows :

Violation/s

Revised norms (Instances of violations in a F.Y.)

Delay in clearance of margin obligations to the Exchange. 1st to 3rd instance : Rs.5,000/- or 1% of funds obligation, whichever is higher. In addition BOLT Terminal to be deactivated immediately and to remain de-activated till margin obligation is cleared. 4th & 5 th instance: Rs.10,000/- or 1.5% of funds obligation, whichever is higher. In addition to the above penalty, BOLT Terminal to be deactivated immediately and to remain de-activated for additional ONE trading day, after clearance of the

obligation. 6 th & 7 th instance: If financial obligation is <= Rs.25000/- then penalty of Rs.10,000/- will be levied. If financial obligation is > Rs.25,000/- penalty of Rs.25,000/or 2% of funds obligation whichever is higher . In addition to the above penalty, BOLT Terminal to be deactivated immediately and to remain de-activated for additional three trading days after clearance of the obligation irrespective of the amount of obligation. 8 th Instance: If financial obligation is <= Rs. 50,000/then penalty of Rs. 25,000/- will be levied. If obligation is > Rs. 50,000/- then penalty of Rs. 50,000/- or 2.5 % of the funds obligation whichever is higher . In addition to the above penalty, BOLT Terminal to be deactivated immediately and to remain de-activated for additional Seven trading days after clearance of the obligation, irrespective of the amount of obligation. Plus the matter would be referred to DAC.

Exemption from Payment of Margins

The following trades executed on the BOLT are exempted from payment of margins : a. 1. 2. 3. Institutional business. For this purpose, institutional investors include : Foreign Institutional Investors registered with SEBI. Mutual Funds registered with SEBI. Public Financial Institutions as defined under Section 4A of the Companies Act, 1956.

4. Banks, i.e., a banking company as defined under Section 5(1)(c) of the Banking Regulations Act, 1949. 5. Insurance companies registered with IRDA.

In cases where early pay-in of securities is made, the outstanding position of the client to the extent of early pay-in.

Early Pay-in Facility o The early pay-in of securities done upto 3.00 p.m. on a day are considered for online release of blocked liquid assets on account of margins on that day. The benefits of early pay-in done after 3.00 p.m. on a day are available on the next trading day.

Members are also able to do early pay-in of securities before execution of the trade on T day to avail benefit of margin exemption.

For availing the benefits of margin exemptions through early pay-in of securities, the members are required to upload a file containing details in respect of the early pay-in at client level to the Clearing House(BOISL). The details in the file is matched against the transaction files received from CDSL and NSDL. Only the matched records are uploaded for Early Pay-In.

Capital Cushion Requirements SEBI has advised BSE to build an administrative mechanism to encourage members to hold capital cushions while operating in the Cash and Derivatives Segments. Accordingly, the following methodology, as advised by SEBI, is being followed by BSE: o o o At the end of each calendar month, Members who have exceeded 90% of utilization of capital during the day for more than 7 days in the current month are identified. In the derivatives segment, the utilisation is monitored after considering initial margins, exposure margins and premium. The capital requirement to bring the utilisation to a level of 85% at the time of violating the trigger point of 90% on each of those occasions is noted for the Members. The highest of such amounts for the identified members during the month is called for as additional capital. The requirement is communicated to the members on the first day of the subsequent month. The Members are provided a time limit of three working days to provide the amount of additional capital in the form of Cash, FDRs and Bank Guarantees only. The additional capital so collected is retained with the Clearing House for a period of one calendar month. No benefit including exposure, margin etc is available to the Member on the amount of additional capital so collected. In case of non- payment of additional capital within the stipulated time limit a penalty as applicable for funds shortage is levied on the Member for the period of default. In case a Member is liable to provide additional capital in the subsequent month, the amount of additional capital shall be recomputed and the excess /deficit is refunded /called for.

o o o o o

Monitoring Business of Brokers BSE closely monitors the outstanding positions of the main Members on a daily basis. For this purpose, it has developed various market monitoring reports based on certain pre-set parameters. These reports are scrutinized by officials of the Surveillance Department to ascertain whether a Member has built up excessive purchase or sale position compared to his normal level of business. Further, it is examined whether purchases or sales are concentrated in one or more scrips, whether

the margin cover is adequate and whether transactions have been entered into on behalf of institutional clients. Even the quality of scrips, i.e., liquid or illiquid, is looked into in order to assess the quality of exposure. Based on an analysis of these factors, the margins already paid and the total capital deposited by the Member with BSE, an advance pay-in is called from the concerned Member.

BSE also scrutinizes the pay-in position of the Members and such Members who have larger funds pay-in positions are , at the discretion of BSE, asked to make advance pay-in on the T+1 day instead of on the T+2 day.

BOLT Deactivation The BOLT TWSs of a Member are deactivated for non-payment / late payment of margins or settlement dues or on apprehension of financial difficulties or on detection of serious irregularities or for frequent violations of trading restrictions. Such decisions are taken on a case-to-case basis. The overall objective in resorting to this ultimate step is to ensure that questionable trading behavior of a Member does not compromise the safety of the market or jeopardize the integrity of the market.

Brokers Contingency Fund BSE operates a Brokers' Contingency Fund, since July 21, 1997 with a view to : A Member desirous of availing of an advance would be required to give a request letter in writing to the Clearing & Settlement Department of BSE stating that as and when there is a shortfall in meeting his funds pay-in obligation, BSE may automatically advance him an amount up to Rs. 10 lakhs to meet such shortfall. A Member would be eligible to avail of advance from the Fund up to a maximum of Rs 25 lakhs at any point of time. The advance would be available only for meeting shortfall in his funds pay-in obligations in a settlement arising out of delivery based transactions and not for any other obligations in a settlement. The advance would be available for a maximum period of 30 days from the date of disbursement. A Member would be eligible to avail of advance from the Fund up to a maximum of six times in a financial year. The amounts advanced from the BCF would be at the following interest rates: o o For the first three times in a financial year @12% p.a. For the next three times in a financial year @15% p.a.

The advance may be availed of by a Member against the value of his pay-out securities (in dematerialised form only) after applying a haircut of 30%. BCF is managed by a Committee comprising of the Managing Director, Chief Operating Officer and three non-elected directors.

BSE contributed Rs.9.51 crores to the corpus of this Fund. All active Members are required to make an initial non-refundable contribution of Rs.2,50,000 to the Fund. The corpus of the fund as on 31/03/08 (unaudited) is Rs. 56 crores. Members are eligible to get advances from this Fund upto a maximum of Rs.25 lakhs at the rate of 12% per annum. BCF has ensured that the settlement cycles at BSE are not affected due to the temporary financial problems faced by its Members, further strengthening the credibility of the stock exchange settlement system.

Trade Guarantee Fund SEBI requires BSE to have a system of guaranteeing settlement of trades or set up a Clearing Corporation to ensure that the market equilibrium is not disturbed in case of payment default by the members. BSE has accordingly instituted a system to guarantee settlement of bonafide transactions of Members which form part of the settlement system. BSE has a Trade Guarantee Fund, in operation since May 12, 1997, with the following objectives : p. To guarantee settlement of bonafide transactions of BSE Members inter-se which form part of the Stock Exchange settlement system, so as to ensure timely completion of settlements of contracts and thereby protect the interest of investors and Members. TGF is managed by the Defaulters' Committee, which is a Standing Committee constituted by BSE, the constitution of which is approved by SEBI. The declaration of a member, who is unable to meet his settlement dues as a defaulter is a pre-condition for invoking the provisions of this Fund. BSE has contributed an initial sum of Rs.60 crores to the corpus of the Fund. All active members are required to make an initial contribution of Rs.10,000 in cash to the Fund and also contribute Re. 0.01 for every Rs.1 lakh of gross turnover in all the groups of scrips by way of continuous contribution which is debited to their settlement account in each settlement. All active Members are required to maintain a base minimum capital of Rs.10 lakhs each with BSE. This contribution has also been transferred to the Fund and has been treated as refundable contribution of the Members. Each Member is also required to provide to the Fund a bank guarantee of Rs.10 lakhs from a scheduled commercial or co-operative bank as an additional contribution to the Fund. The present corpus, as on 31/03/2008 ( unaudited ), is Rs 181 crores (cash component excluding collaterals & additional capital) TGF has eliminated the age-old counter party risk, so that if a Member is declared a defaulter, other Members do not suffer.

INVESTORS or CUSTOMERS PROTECTION FUND (IPF)

Investors' Protection Fund In accordance with the guidelines issued by the Ministry of Finance, Government of India, the Exchange has set up an Investor Protection Fund (IPF) on July 10, 1987 to meet the claims of investors against defaulter members.

The Fund is managed by the trustees appointed by the Exchange.

The members at present contribute to this Fund Re.0.15 per Rs.1 lakh of gross turnover, which is debited to their general charges account. The Stock Exchange contributes on a quarterly basis 2.5% of the listing fees collected by it. Also the entire interest earned by the Exchange on 1% security deposit kept with it by the companies making public/rights issues is credited to the Fund. As per the SEBI directive, auction proceeds in certain cases, where price manipulation / rigging was suspected, have been impounded and transferred to the Fund. Also, the surplus lying in the account of the defaulters after meeting their liabilities on the Exchange is released to them after transferring 5% of the surplus amount to this Fund.

As at the end of June 30, 2002, the corpus of the Fund was Rs 157.03 crores.

The maximum amount presently payable to an investor from this Fund in the event of default by a member is Rs.10.00 lakhs. This has been progressively raised by the Exchange from Rs.5,000/- in 1988 to the present level and is the highest among the Stock Exchanges in the country.

The arbitration award obtained by investors against defaulters is scrutinized by the Defaulters Committee, a Standing Committee constituted by the Exchange, to ascertain their genuineness, etc. Once the Defaulter Committee is satisfied about genuineness of the claim, it recommends to the Trustees of the Fund for release of the award amount or Rs.10.00 lacs, whichever is lower. After the approval of the Trustees of the Fund, the amount is disbursed to the clients of the defaulters from the Investor Protection Fund.

Trade Guarantee Fund - G -Sec Segment In 2003, BSE had set up a distinct Trade Guarantee Fund known as GSEC Trade Guarantee Fund for trading in the Central Government Securities and such fund was created with an initial contribution of Rs. 5 crores by transferring the said amout from the free reserves of BSE

The present corpus as on 31/03/08 (unaudited) is Rs.7 crores.

q. To inculcate confidence in the secondary market traders including the global investors to attract larger participation. r. To protect the interests of the investors and to promote the development and regulation of the secondary market. make temporary refundable advance(s) to the Members facing temporary financial mismatch as a result of which they may not be in a position to meet their financial obligations to BSE in time; protect the interest of the investors dealing through the BSE Members by ensuring timely completion of settlement inculcate confidence in investors regarding safety of their bonafide transactions
DAY T+3 ACTIVITY TIME

Patawat Arbitration session : Arbitration 10:30 a.m. to 11:30 a.m. awards to be obtained from officials of the Bad Delivery Cell Securities under objection to be submitted in the Clearing House. The delivering members to collect such securities under objection from the clearing house Arbitration awards for invalid objection to be obtained from members of the Arbitration Review Committee/officials of the Bad Delivery Cell. 11:00 a.m. to 12:00 noon 2:00 p.m. to 3:00 p.m.

5:00 p.m. to 5:30 p.m.

T+4

Members and institution to submit rectified securities, confirmation forms and invalid objections in the clearing house. Rectified securities/invalid objections will be delivered to the receiving members

1:00 p.m. to 2:00 p.m.

3:00 p.m. to 4:00 p.m.

T+5

Arbitration Awards for invalid 11:30 a.m. to 12:30 p.m. rectification to be obtained from officials of the Bad Delivery Cell Securities to be lodged with the clearing house unto 1:00 p.m

The transactions pertaining to un-rectified and invalid rectification of securities are directly closedout by BSE as per the formula. The shares in physical form returned under objection to the Clearing House as explained earlier are required to be accompanied by an arbitration award (Chukada) except in certain cases where the

receiving Members are permitted to submit securities to the Clearing House without "Chukada" or arbitration award in the following cases:

Gross exposure Limit/Margin As per the latest rules of SEBI, a trading member having Rs 1 crore exposure in Group 1 securities (highly liquid securities) will have adjusted gross exposure of Rs 1 crore. For exposure of Rs 1 crore in Group 2 (securities with medium liquidity) and Group 3 (illiquid scrips), the adjusted gross exposure will be Rs 3 crore and Rs 5 crore respectively. Hence, though the outstanding position is Rs 3 crore, the adjusted gross exposure for the member will be considered as Rs 9 crore. Stock exchanges use margin as a tool to control the activities of the broker. How much business a broker can do depends on the deposit the broker has with the stock exchange concerned. In a volatile situation, when the exchange wants to cut down the exposure of the broker, the exchange uses margin as a tool to do so.

Gross Exposure Limits Members are also subject to gross exposure limits. Gross exposure for a member, across all the securities in rolling settlements, is computed as the absolute (buy value - sell value), i.e. ignoring +ve and -ve signs, across all open settlements.Open settlements would be all those settlements for which trading has commencedand for which settlement pay in is not yet completed. The total gross exposure for a member on any given day would be the sum total of the gross exposure computed across all the securities in which the member has an open position

In case of securities that are traded in the Rolling settlement (Type 'N'and security series 'EQ'), the GE multiple for each security are as under: Group I 1 time Group II 3 times Group III 5 times

All new securities to be traded on the Exchange shall be subject to exposure multiple of 2 times. It is clarified that while computing the gross exposure at any time for a particular trading day, for the purpose of the above limits, members are required to add the net outstanding positions of the previous settlement period to the cumulative net outstanding positions as of that particular trading day until the securities pay in day for the previous settlement period. Members exceeding the gross exposure limit are not permitted to trade with immediate effect and are not permittedto do so until the cumulative gross exposure is reduced to below the gross exposure limits (as defined above or any such lower limits as applicable to the members) or they increase their limit by providing additional base capital.Members who desire to reduce their gross exposure may submit their order entry requirements as per the prescribed format and if members desire toincrease their limits additional deposits by way of bank guarantee or Fixed Deposit Receipt (FDR) have to be submitted to NSCCL. Additional deposits by way of securities in electronic form (demat securities) may be deposited as per procedures.The additional deposits of the member are used first for adjustment against grossexposure of the member. After such adjustments, the surplus additional deposits, if any, excluding deposits in the form of securities is utilized for meeting the margin requirements

Risk Management Nature of Risks Reduction and Control of Risks Know Your Client Scheme Database of lost , Stolen , Misplaced Securities Client Caution Database Verification of shares at members office Inspection

Nature of Risks: The Exchange has been exposed to a large number of risks, which have been inherently borne by the member brokers for all times. Since the introduction of the screen based trading the nature of risks to which the members of the Exchange are exposed to has undergone radical transformation. At the same time the inherent risk involved with the trading of paper based securities still remains. Though the process of dematerialisation has already begun, till such that it is made compulsory in all scrips, the risk of trading in fake/forged shares and instances of loss of shares etc. will continue to exist. The safe custody of these shares in physical form in the Exchange as well as in the member brokers offices is of prime importance. The Risks can be classified as under:

1. o o o 2. o o o

Risks associated with Paper Based Trading Lost/misplaced securities damage to securities loss of securities in transit Client Risk Client default Client absconding Fake/ forged/stolen securities introduced by the clients

Reduction and Control of Risks: As a measure of the pro-active risk control several measures have been initiated by the Exchange to reduce the risks to which the Exchange and the member brokers are exposed. In this regard the Exchange has initiated the following measures:

1.

Know Your Client Scheme :

Under the procedure the member brokers of the Exchange are compulsory required to obtain detailed information of clients prior to commencement of any transactions for new clients. A similar procedure is also to be followed for existing clients. This information is to be made available to the Exchange authorities whenever called for. In case the member brokers fails to furnish the same it is viewed seriously. 2. Database of lost , Stolen , Misplaced Securities :

The Exchange maintains a database on all the shares that have been reported as lost, stolen, duplicate etc. by the Companies / registrars. The information available through the database is time relevant thus the database is modified on a regular basis and is downloaded by the members through BOLT on a weekly basis. This database is also provided to the Clearing House. The member brokers can thus reduce the instances of delivery of shares that have been reported by the Company as bad delivery by checking all the deliveries in their office with the database provided. The Exchange has designed and developed a software module for the above for the benefit of the members. The Clearing House also uses the database. At the time of pay-in the members of the Exchange are required to submit the details of the shares being deposited in the pay-in in a softcopy in a prescribed format.. These details are checked against the database and a report is generated in case a match is found. Such shares are then reported as bad delivery in the Exchange. Further follow-up is done with the delivering broker and they are directed to lodge a police complaint against the client introducing the stolen shares.

3.

Client Caution Database :

The Risk Management department in conjunction with the Bad Delivery Cell of the Exchange, the Exchange has designed and developed a client database. All member brokers whose clients / subbrokers have introduced fake / forged shares are required to lodge a FIR / Police complaint against their clients and also report the same to the Exchange. The information of such clients is called for in a prescribed format. As per the scheme the members have to collect detailed information about the clients. These details are incorporated in the database, which is downloaded to the members, as a precautionary measure. The member brokers at the time of admitting new clients can refer to the client caution database for further verification. 4. Verification of shares at members office :

The Risk Management Committee has outlined a process for minimising the risks arising out of Fake/ forged /stolen shares introduced by the clients of the member brokers. As per the procedure outlined issued by the Exchange, in case the transaction in a script with one particular client in a settlement exceeds Rs. 10 lakhs then the member brokers are required to send the photocopies of the transfer - deeds and the share certificates to the Company / Registrar for verification of the material particulars. The members can select a random sample for the same from the lot. A similar procedure should also be followed in case the shares worth more than Rs. 10 lakhs are received from the Clearing House during pay-out in one scrip. The basic idea behind the introduction of this procedure is to prevent Fake/ forged/stolen shares from being introduced in the market. The Exchange issued a notice outlining the procedure to be followed. The above procedure is an important Risk Management Tool especially where there exists a large volume of deliveries. The Risk Management Department acts as a facilitator in this regard and has written to all "A" group and B1 group companies in this regard seeking their co-operation. 5. Inspection :

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

Integrated Comprehensive Insurance Policy for Members To reduce the systematic risk, Securities & Exchange Board of India ( SEBI) vide its circular ref. No SMD/SED/RCG/270/96 dated January 19th, 1996, had directed all stock exchanges to ensure that all active Members are properly insured. Insurance companies in consultation with BSE have offered an insurance policy which covers losses on account of trading as well as back office losses to the Members. The minimum sum insured is Rs.5 lakhs per Member

Presently, all active Members obtain the said policy directly from the insurance companies and then inform BSE about the same.

Property Insurance Policies The assets at BSE are fully covered through fire, burglary theft ( including terrorism) insurance policies.

Surveillance BSE is one of the few stock exchanges in the world, which has obtained the ISO certification for its surveillance function. The main objective of the surveillance function is to promote market integrity in two ways, By monitoring price and volume movements (volatility) as well as by detecting potential market abuses (fictitious/ artificial transactions, circular trading, false or misleading impressions, insider trading, etc) at a nascent stage, with a view to minimizing the ability of the market participants to influence the price of any scrip in the absence of any meaningful information By taking timely actions to manage default risk.

The surveillance activities at BSE are allocated to three Cells: Price Monitoring: is mainly related to the price movement/ abnormal fluctuation in prices or volumes of any scrip Investigations: conducting snap investigations/examinations/detailed investigations in scrips where manipulation /aberration is suspected. Position Monitoring: relates mainly to abnormal positions of Members in order to manage the default risk

Price Monitoring Cell

The function of this Cell is to detect potential market abuses at a nascent stage to reduce the ability of the market participants to unduly influence the price of the scrips traded at BSE by taking surveillance actions like reduction of circuit filters, imposition of special margin, transferring scrips on a trade-to-trade settlement basis, suspension of scrips/ members, etc. These pro-active measures are taken based on the analysis/ processing of alerts generated based on various parameters and other inputs like news, company results, etc. The broad parameters considered for generation and analysis of alerts are price movement, top 'n' turnover, scrips traded infrequently, scrips hitting new high/ low, scrips picked up for rumour verification, etc. The scrips picked up based on the preliminary analysis/ enquiries are forwarded to the Investigation cell for further examination/ investigation. The detail rationale of the surveillance actions taken by BSE from time to time are as follows : o o Special Margins Special margins are imposed on such scrips which have witnessed an abnormal price/ volume movement. Special margin is imposed by BSE @ 25% or 50% or 75% as the case may be, on the client wise net outstanding purchase or sale position (or on both side). Reduction of Circuit Filters The circuit filters are reduced in case of illiquid scrips or as a price containment measures. The circuit filters are reduced to 10 % or 5 % or 2 % as the case may be, based on the criteria decided by the Surveillance Department. No circuit filters are applicable on scrips on which derivative products are available and scrips which are liquid and included in indices on which derivative products are available. However, BSE imposes dummy circuit filter on these scrips to avoid punching errors, if any. Circuit Filter of 20 % is applicable on other scrips which are not included in the abovementioned category. Trade-to-Trade If a scrip is shifted to the Trade-to-Trade settlement basis, selling/ buying of shares in that scrip results into giving/ taking delivery of shares at the gross level and no intra day netting off/ square off facility is permitted. The scrips which form part of the 'Z group' are compulsorily settled on a trade-to-trade basis. In addition, the Surveillance Department transfers various scrips from time to time to the trade-to-trade settlement basis (T&TS group) based on the criteria decided jointly by the stock exchanges and SEBI. Suspension of a scrip A scrip is suspended for trading by the Surveillance Department in exceptional cases, pending investigation or if the same scrip has been suspended by any other stock exchange as a surveillance action.

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Rumour Verification The Surveillance Department liaises with the Compliance Officers of the listed companies to obtain their comments on various price-sensitive corporate news items appearing in the media. Comments received from the companies are disseminated to the market by way of BOLT Ticker and/ or Notices

on the BSE website. If the company denies the news / information, a letter is sent to the company asking them to take up the matter with the concerned media.

Investigations Cell The Investigation Cell conducts following types of analysis of suspected market irregularities in a systematic and logical manner and then take appropriate and timely actions. o o Snap Investigations Potential cases of market irregularities are taken up for further analysis. A preliminary analysis of the trading pattern and corporate developments in the scrip is done to ascertain whether the price or volume variation observed requires further detailed analysis. Examinations Examinations are a more detailed form of preliminary analysis of the trading pattern and various developments in the company wherein a report is prepared. These examinations are conducted usually on receiving a reference from SEBI or any other department of BSE or is based on an investor complaint. Investigations These are full-fledged and detailed investigations wherein a complete analysis is conducted in a systematic and logical manner based on the information available with BSE and information sought/received from the Members, companies, depositories and various other sources. These investigations are conducted to establish the manipulation that was suspected in the preliminary analysis.

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The Surveillance Department imposes a penalty or deactivates the BOLT terminals or suspends the Members who are involved in market manipulation, based on the input/ evidence available from the investigation report or as and when directed by SEBI. The cases of habitual offenders are taken to the Disciplinary Action Committee, which takes necessary disciplinary actions against such Members.

Position Monitoring The Surveillance Department closely monitors the outstanding exposure of Members on a daily basis. For this purpose, it has developed various market monitoring reports. The reports are scrutinized to ascertain whether there is excessive purchase or sale position build up compared to the normal business of the Member, whether there are concentrated purchases or sales, or whether the purchases have been made by inactive or financially weak Members. Even the quality of scrips is considered to assess the quality of exposure. Based on an analysis of the above factors and the margins already paid and the capital deposited by the Member, early pay-in calls are made, if required. Some Members are even advised to reduce their outstanding exposure in the market. Trading restrictions are placed on financially weak Members as and when deemed fit after taking into consideration their past track record. The Department, as such, executes an important risk

management function to avert possible payment default of Members by taking timely and corrective measures.

Market Wide Circuit Breakers The earlier Circuit Filters at individual scrip level used to restrict the movements of indices as well. Now, there are no Circuit Filters on the scrips forming part of popular indices like SENSEX. In order to contain huge price movements of index scrips, SEBI has mandated that Market Wide Circuit Breakers (MWCB) which at 10-15-20% of the movements in either BSE SENSEX or NSE Nifty whichever is breached earlier would be applicable. This would provide a cooling period to the market participants and to assimilate and re-act to the market movements.

The trading halt on all stock exchanges would take place as under;

- In case of a 10% movement in either index, there will be a 1-hour market halt if the movement takes place before 1:00 p.m. In case the movement takes place at or after 1 p.m. but before 2:30 p.m., there will be a trading halt for 1/2 hour. In case the movement takes place at or after 2:30 p.m., there will be no trading halt at the 10% level and the market will continue trading.

- In case of a 15% movement in either index, there will be a 2-hour market halt if the movement takes place before 1:00 p.m. If the 15% trigger is reached on or after 1:00 p.m. but before 2 p.m., there will be a trading halt for 1 hour. If the 15% trigger is reached on or after 2:00 p.m., the trading will halt for the remainder of the day.

- In case of a 20% movement in either index, the trading will halt for the remainder of the day.

The above percentage would be translated into absolute points of the Index variation on a quarterly basis. These absolute points are revised at the end of each quarter

The Market Wide Circuit Breakers at a national level have been introduced in the Indian markets for the first time. This is on the lines of the system prevailing in the US markets.

Individual Scrip Circuit Filters

Circuit Filter of 20% is applicable on all scrips except the scrips on which derivative products are available and are part of indices on which derivative products are available. However, BSE imposes dummy circuit filter on these scrips to avoid punching errors, if any.

What is Arbitration? (Determining disputes or differences) With a view to ensuring speedy and effective resolution of claims, differences and disputes between non-Trading Members and Trading Members and Trading Members inter-se, BSE has laid down an arbitration procedure. This procedure is duly embodied in the Rules, Bye-laws and Regulations of BSE, and duly approved by the Government of India/SEBI, under the Securities Contracts (Regulation) Act, 1956. Effective from 31st January, 2009, the Complaint against trading members of the Exchange or Applications for Arbitration should be filed at the concerned Regional Arbitration Centre referred to in column 1 below covering that State or Union Territory of India, referred to in Column 2 below, within which the most recent address / registered office address of the constituent, as duly communicated in writing to the trading member in accordance with law, is located. Provided in respect of a non-resident Indian Constituent, the Seat of Arbitration shall be Regional Arbitration Centre which covers the States and Union Territories given in Column 2, in which lies the address or the Registered Office address, as the case may be, of the trading member, depending upon corporate or non-corporate membership of the trading member. The hearings shall be held in the concerned Regional Arbitration Centre in which the Applicant had duly filed the Application for Arbitration.

JURISDICTION OF COURTS The Courts in Mumbai shall have exclusive jurisdiction in respect of all proceedings to which the Exchange is a party, and in respect of all other proceedings, the Courts having jurisdiction over the area in which the respective Regional Arbitration Centre is situated, shall have jurisdiction.

The investors are required by law, to file their grievances and/or Arbitration References in the concerned RAC, which has geographical jurisdiction over the subject matter as above The Exchange redresses investors complaints thru arbitration and IGRC mechanism, which are quasi-judicial in nature. The period consumed in redressal of complaint thru IGRC will not be considered while measuring period of limitation in filing arbitration application provided the complaint and / or arbitration application is / are filed at the concerned Regional Arbitration Centre. Only those Arbitration References and complaints filed on or after 31st January, 2009 will attract the above provisions

Types of Arbitrtion: Arbitration between Trading Members inter-se

Arbitration between Non-Trading Members and Trading Members

Technology BSE places a great deal of emphasis on Information Technology for its operations and performance. The 'Operations & Trading Department' at BSE continuously upgrades the hardware, software and networking systems, thus enabling BSE to enhance the quality and standards of service provided to its members, investors and other market intermediaries.

BSE strictly adheres to IS policies and IS Security policies and procedures for its day-to-day operations on 24x7 basis which has enabled it to achieve the BS7799 certification and the subsequent ISO 27001 certification. In addition, BSE has also been successful in maintaining systems and processes uptime of 99.99%. BOLT To facilitate smooth transactions, BSE had replaced its open outcry system with the BSE On-line Trading (BOLT) facility in 1995. This totally automated, screen-based trading in securities was put into practice nation-wide within a record time of just 50 days. BOLT has been certified by DNV for conforming to ISO 27001:2005 security standards. The capacity of the BOLT platform stands presently enhanced to 80 lakh orders per day. BSEWebx.co.in BSE has also introduced the world's first centralized exchange based Internet trading system, BSEWEBx.co.in. The initiative enables investors anywhere in the world to trade on the BSE platform. bseindia.com BSE's website www.bseindia.com provides comprehensive information on the stock market. It is one of the most popular financial websites in India and is regularly visited by financial organizations and other stakeholders for updates. Other Technology-based Initiatives BSE, along with its strategic partners, have put into place several critical processes/systems such as Derivatives Trading & Settlement System (DTSS) Electronic Contract Notes (ECN) Unique Client Code registration (UCC) Real-time Data Dissemination System Integrated Back-office System - CDB / IDB Book Building System (BBS) Reverse Book Building System (RBBS) Debt Market Director's Database

A Large Private Network BSE operates a large private network in India. The network uses following segments to cater to market intermediaries:-

BSE's Campus LAN: Connects market participant offices across 20 floors of BSE campus to BSE systems. BSE Campus comprises of 3 BSE buildings: P.J. Towers, Rotunda and Cama building

BSE WAN: TDM / MPLS lines from different service providers cater to connectivity requirements of market participants across the country. Wired / Wireless media is used. VSATs: Satellite based communication system serves the connectivity requirements of market participants in remote areas. Services are provided through BSE's Satellite Communication Hub in Mumbai. Connectivity forms are available at url : http://www.bseindia.com/about/bolt_connect_forms.asp

BSE Online Surveillance System - integrated (BOSS-i). an Real-time system to closely monitor the trading and settlement activities of the member-brokers. This system enables BSE to detect market abuses at a nascent stage, improve the risk management system and strengthen the self-regulatory mechanisms. State-of-the-art Hardware BSE uses higher-end, fault-tolerant systems for its trading and related functionalities. It uses Integrity Non-stop NS16000 and S88000 systems for its online trading systems (BOLT). The systems have been designed to deliver the best performance without compromising on key factors of availability, scalability, ROI and TCO.

RISC based Unix Severs rp8420 from HP: for our Derivatives, Settlement, Backoffice, Data Feed, BBS, RBBS and other systems related to trading and related functionalities. The systems are facilitated by the use of the robust and high available storage subsystems from HP.

Intel blade servers running on Microsoft platform are used for the Internet based trading system (ITS) enabling the end users to carry out the trading activities from any location facilitated by the internet.

Intel blade servers running on Microsoft platform are also used for bseindia.com website, one of the best portals on the capital market which is also facilitated by the regional languages viz Hindi and Gujarati.