INTERNAL AUDIT OF STOCK BROKERS

REFERENCER ON INTERNAL AUDIT OF STOCK BROKERS 1
INTRODUCTION Stock Broker plays an important role in helping both the seller and the buyer of the securities to enter into a transaction. The buyer and seller may be either a broker or a client. The transaction so entered cannot be annulled except in the case of fraud, willful misrepresentation or upon prima-facie evidence of a material mistake in the transaction, in the judgment of the authorities. The stock broker, while executing a order, may on behalf of his client buy or sell securities from his own account i.e. as a principal or an agent. For each transaction the stock broker has to issue necessary contract note indicating whether the transaction has been entered into by him as a principal or as an agent for another. While buying or selling securities as a principal, the stock broker has to obtain the consent of his client and the prices charged should be fair and justified by the conditions of the market. A stock broker, thus, being a vital link between the regulators, issuers and investors, any aberrations in the capital markets has presumably direct bearing on the stock brokers, his governance processes and practices which in turn affect the confidence of the markets and investors. It is, therefore, convincingly argued that the persons who operate in the market are required to maintain high standards of integrity, promptitude and fairness in the conduct of their business dealings. It is, therefore, necessary that stock brokers put in place processes to ensure good governance practice and also to have constant monitoring and surveillance on the acts of intermediaries. Who can undertake Internal Audit of Stock Brokers? SEBI authorized the Practising Company Secretaries, amongst other professionals to carry out complete internal audit of stock brokers/stock broker/trading members/clearing members on a half yearly basis. 1 Stock broker/trading members and clearing members in any of the segments are required to carry out internal audit in respect of their operations on any exchange and submit exchange wise and segment wise [Capital market (Cash), F & O, Currency Futures and Wholesale Debt Market (WDM)] report on half yearly basis. The first half year period would start from October 2008. Scope of Internal Audit The scope of this internal audit is wide enough and covers, inter alia, existence, scope and efficiency of the internal control system and compliance with the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, circulars issued by SEBI, agreements, KYC requirements, Bye Laws of the Exchanges, data security and insurance in respect of the operations of stock brokers/clearing members.
Circular MRD/DMS/Cir-29/2008 dated October 21, 2008
Objectives of internal audit The objective of internal audit of stock brokers is (i) to ensure that the books of account, records (including telephone records and electronic records) and documents are being maintained in the manner required under SEBI Act, 1992, SCR Act, 1956 and SEBI (Stock brokers and Subbrokers) Regulations, 1992. to ascertain as to whether adequate internal control systems, procedures and safeguards have been established and are being followed by the intermediary to fulfill its obligations within the scope of the audit. to ascertain as to whether any circumstances exist which would render the intermediary unfit or ineligible to ascertain whether the provisions of the securities laws and the directions or circulars issued thereunder are being complied with to ascertain whether the provision of stock exchange bye-laws, notices, circulars, instructions or orders issued by stock exchanges are being complied with to inquire into the complaints received from investors, clients, other market participants or any other person on any matter having a bearing on the activities of the stock broker.
(ii)
(iii) (iv) (v) (vi)
How to prepare for Audit? It is advisable for an auditor to collect/study the following information, before taking up the audit of an entity: Place where the books of accounts are maintained Details of membership of different exchanges and segments List of the terminals of the exchanges, their locations and authorized persons Details of the sub-brokers and remisers Details of branch office and in-charge/branch head Shareholding pattern and details of dominant promoters Names of the chairman, MD, whole time directors, CEO, COO, designated directors, and compliance officer Details of investor complaints received, resolved and pending during the inspection period. Latest Annual Reports. Previous audit reports and compliances / comments of previous inspections. Information from the website of stock broker for group details, products offered, geographical spread, other activities, stock broker's client funding and other details. Study the SEBI Act, SCRA Act, SCRR, SEBI (Stock broker and Sub-brokers) Regulations, circulars, stock exchange bye-laws, notices and directions relevant to stock broker audit from the website of SEBI and stock exchange. Formats for member client agreements, client registration forms, risk disclosure documents, contract note, STT annexure, register of securities, etc. Trading pattern of stock broker to understand the proportion of proprietary trading, retail clients trading, institutional clients trading and internal clients trading.
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Documents/Records to be checked (i) Financial statements: Balance Sheet Profit & Loss Account Funds Flow Statement Cash flow statement General ledger, journal vouchers and trial balance Bank books Cash books Bank statements Branch reconciliations Back office statements/reports Transaction (Sauda) register and security register (ii) Regulatory documents: SEBI Registration Certificate List of sub- brokers List of branches Membership letters of the exchanges and the segments operated in (iii) Records List of clients KYC forms Member constituent agreements Risk disclosure documents Branch accounts Proprietary accounts
2 REGULATORY FRAMEWORK GOVERNING STOCK BROKERS

The following discussions will provide the overall regulatory framework, the stock brokers are subject to and an insight in to the various compliances required to be made by the stock brokers. LEGISLATIONS The main legislations governing the securities market are: (i) (ii) Securities Contracts (Regulation) Act, 1956, providing for regulation of transactions in securities through control over stock exchanges; SEBI Act, 1992 establishing SEBI to protect investors and develop and regulate securities market;
(iii) Depositories Act, 1996 providing for electronic maintenance and transfer of ownership of dematerialised securities; and (iv) Prevention of Money Laundering Act, 2002 imposing obligation on intermediaries to verify identity of clients, maintain certain records and furnish certain information to the relevant authority; Companies Act, 1956 setting out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues. Securities Contracts (Regulation) Rules, 1957, for carrying out the purposes of Securities Contracts (Regulation) Act, 1956. SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992, to regulate the affairs, functioning of stock brokers. It has also made certain code of conduct to be followed by members.
(v)
RULES AND REGULATIONS (i) (ii)
(iii) SEBI (Insider Trading) Regulations, 1992, prohibits the insider trading and considers it an offence. This regulation defines various terms such as insider, connected person, deemed to be connected person, price sensitive information etc. An intermediary is covered under the definition of deemed to be connected person. The definition of insider covers the person who is deemed to be connected and accordingly an intermediary is an insider who should not contravene the provisions of this regulation. Certain disclosures are also required to be made under these regulations. (iv) SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to securities market) Regulations, 1995, enables SEBI to investigate into cases of market manipulation and fraudulent and unfair trade practices. The regulations specifically prohibit market manipulation, misleading statements to induce sale or purchase of securities, unfair trade practices relating to securities. SEBI can conduct investigation, suo moto or upon information received by it, by an investigating officer in respect of conduct and affairs of any person dealing, buying/selling/dealing in securities.
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(v)
SEBI circulars and directives, various circulars are issued by SEBI from time to time for issuing directives to market participants. Bye-laws, the bye laws of stock exchanges basically deal with payment of fees, code of advertisement, arbitration, dealing with sub-brokers and other intermediaries, sharing brokerage; in respect of trading and/or clearing members. Rules, the rules of stock exchanges basically cover aspects such as eligibility, admission of trading/clearing members, termination of membership, re-admission of defaulters, disciplinary proceedings, misconduct etc.
BYE LAWS, RULES AND REGULATIONS OF STOCK EXCHANGES (i)
(ii)
(iii) Regulations, cover aspects such as requirements about maintenance of books and other documentary requirements, in dealing with clients, in dealing with sub-brokers, in issuing contract notes etc. (iv) Circulars, the stock exchanges issue directives to their trading/ clearing members through circulars from time to time.
A stock broker is thus subject to various securities laws and is under an obligation to adhere to various compliances.
3 COMPLIANCE CHECKLIST FOR NSE TRADING MEMBERS*

Submission of Requirements Annual submissions including Audited financial statements, Net worth certificate. Membership in other stock exchanges, Details of directors/ proprietor, Shareholding/sharing pattern, Dominant/original shareholders/partners, Undertaking by relatives/ corporate shareholders supporting dominant shareholders/ partners, Details of stock exchanges in which member corporate is listed. Annual submissions are mandatory both in physical form as well as by way of upload in electronic format through ENIT using digital signature (NSE/COMP/10774 dated May 30, 2008) (NSE/MEMB/7835, 06/09/2006) Periodicity Yearly Time of Submission Department Within 6 months from the end of accounting year of the member Membership
Yearly Proof of Insurance cover (NSE/MEMB/7504, 19/05/2006) Annual Compliance Report Yearly (NSE/INSP/7494, 16/05/2006)
By 31st July Within 3 months from the end of the financial year April-March By 31st July
Membership Inspection
SSL certificate for IBT Services (NSE/CMTR/7636, 28/06/2006), (NSE/CMTR/01642, 12/05/2000) System Audit Report (NSE/CMTR/7634, 28/06/2006), (NSE/CMTR/8195, 11/12/2006), (NSE/CMTR/6128, 10/05/2005), (NSE/CMTR/8089, 10/11/2006) Net worth certificate (NSE/MEMB/8166, 04/12/2006)
Yearly
Capital Market Trade Capital Market Trade
Yearly
By 31st July
Half yearly
Within 3 months from the end of half year
Membership
Auditor' compliance certificate & Net worth certificate by members providing margin trading facility (NSE/MEMB/4973, 07/04/2004), (NSE/MEMB/4972, 07/04/2004)
Half yearly
Within one month from the end of March & September
Membership
* Compiled and updated on the basis of the checklist prepared by Shri J Ravichandran, Director, Finance & Accounts, Legal & Secretarial, National Stock Exchange of India Ltd. 6
Monthly disclosure of client funding (NSE/CMTR/6963, 19/12/2005), (NSE/CMTR/6962, 19/12/2005), (NSE/CMTR/6373, 13/07/2005), (NSE/CMTR/8454, 31/01/2007) Internet trading statistics Reporting bulk/block deal details (in case of any mismatch in the indicative report of the Exchange). (NSE/CMTR/7864, 13/09/2006) Single bulk deal immediately upon execution of the order. (NSE/CMTR/4808 16/02/2004) (NSE/CMTR/7864, 13/09/2006) Upload of daily margin trading file (Disclosure of exposure to margin trading facility) (NSE/MEMB/4972, 07/04/2004), NSE/MEMB/4973, 07/04/2004), (NSE/CMTR/4974, 07/04/2004), (NSE/ CMTR/5420, 09/09/2004), (NSE/ CMTR/5914, 10/03/2005), (NSE/ MEMB/5917, 11/03/2005), (NSE/ CMTR/7898, 21/09/2006). Upload of OTR file (Obligation Transfer Request allocation of INST trades) (NSE/CMPT/1640, 11/05/2000), (NSE/CMPT/5817, 09/02/2005), (NSE/CMPT/6653, 16/09/2005) Upload of CP file (CP Code Modification) (NSE/CMPT/0750, 30/12/1998), NSE/CMPT/5817, 09/02/2005), (NSE/CMPT/6119, 09/05/2005) Upload of RC file (Reallocation of custodial trades) (NSE/CMPT/6653, 16/09/2005), (NSE/CMPT/6656, 19/09/2005) Upload of CC file (Custodial Participant Contractions) (NSE/CMPT/6323, 01/07/2005), (NSE/CMPT/6653, 16/09/2005) Upload of CLD file (Client Code Modification) (NSE/CMPT/02822, 31/08/2001), (NSE/CMPT/5591, 11/11/2004) Upload of CEP file (Early Pay IN Client-wise allocation) (NSE/CMPT/6481, 05/08/2005) Upload of CPD file (Client Direct Payout) (NSE/CMPT/4006, 13/03/2003)
Monthly
Within seven days from the end of the month By Monday of the following week Before 6:00 pm on the trade day Within one hour of closure of trading hours Before 9:00 pm on the trade day
Capital Market Trade
Weekly Daily
Capital Market. Trade Capital Market Trade Capital Market Trade Capital Market Trade
Daily
Daily
Daily
On T day, I upload 6.00 pm, II upload 6.30 pm, On T+1 day, III upload 9.00 am On T day by 4.45 pm
NSCCLSecurities
Daily
NSCCLSecurities
Daily
On T+1 day by 9.30 am On T day, I upload 6.30 pm, On T+1 day, II upload 9.30 am On T day by 4.45 pm On T+2 day up to 10.30 am On T+2 day by 9.30 am
NSCCLSecurities NSCCLSecurities NSCCLSecurities NSCCLSecurities NSCCLSecurities
Daily
Daily
Daily
Daily
Pay in of Securities (NSE/CMPT/4991, 16/04/2004) Pay in of Funds (NSE/CMPT/4991, 16/04/2004) Reporting settlement of trade for trade transactions (Market type Z seriesBT) Upload of Client Margin Report for F & O segment (NSE/CMPT/4206, 17/06/2003), (NSE/CMPT/7825, 05/09/2006) Reporting of WDM trades not executed on Neat system Reporting cancellation / modification / reschedule of WDM trades Reporting settlement of WDM trades Change in status and constitution of the member (NSE/MEMB/4299, 25/07/2003) Appointment of Authorized Person in F & O segment (NSE/MEMB/6882, 21/11/2005), (NSE/MEMB/6769, 14/10/2005), (NSE/MEMB/6882, 21/11/2005) Appointment and change of Compliance Officer (NSE/MEMB/3441, 14/06/2002) Advertisements (Rule (5) (h) of Chapter IV of the Rules of the Exchange) Commencing Margin Trading Facility in CM Segment (NSE/MEMB/4973, 07/04/2004) Application for Approval of User (NSE/MEMB/3576, 29/08/2002), (NSE/MEMB/3655, 04/10/2002), NSE/MEMB/7992, 10/10/2006) Application for using CTCL facility (NSE/CMT/1641, 12/05/2000), (NSE/CMTR/3896,28/01/2003), (NSE/CMTR/6386, 15/07/2005), (NSE/CMTR/6552,24/08/2005) (NSE/FAOP/7798, 25/08/2006) Upload of CTCL terminal details (Activation /Deactivation/Shifting of CTCL terminals) (NSE/MEMB/7913, 25/09/2006), (NSE/MEMB/7992, 10/10/2006)
Daily Daily Daily Daily
On T+2 day by 10.30 am On T+2 day by 10.30 am Upon settlement of the trades Within two days from trade date Upon issue of contract notes By the scheduled settlement date Upon settlement of trades Prior Approval required Prior Approval required
NSCCLSecurities NSCCLSecurities NSCCLSecurities NSCCL-Risk
Daily Daily Daily One time / need based submissions One time / need based submissions One time / need based submissions One time / need based submissions One time / need based submissions One time / need based submissions One time / need based submissions
WDM WDM WDM Membership Membership
Intimation to Exchange Advertisement to be submitted & written permission to be obtained before publication Prior Approval required Prior Approval required Prior Approval required
Membership Membership
Membership Membership
One time / need based submissions
Before activations of any new CTCL terminal / Immediately upon deactivation / shifting of existing terminal Prior Approval required
Membership
Application Based
for providing trading
Internet facility
One time / need based 8
(NSE/CMTR/6552, 24/08/2005), (NSE/CMTR/7797, 25/08/2006), (NSE/MEMB/7913, 25/09/2006), (NSE/CMTR/8089, 10/11/2006) Activation / Deactivation of Proprietary trading facility (NSE/CMTR/7650, 04/07/2006), (NSE/FAOP/7652, 04/07/2006) Application for dealing with broker or sub-broker of same / another Exchange (NSE/CMTR/4757, 22/01/2004), (NSE/FAOP/4758, 22/01/2004) Upload of unique client code file (NSE/INVG/7117, 31/01/2006), (NSE/INVG/8152, 30/11/2006) (NSE/INVG/8310, 29/12/2006) (NSE/INSP/10239, 11/02/2008) (NSE/INSP/10367, 28/02/2008) Extension of NEAT trading terminals
submissions
One time / need based submissions One time / need based submissions One time / need based submissions
Prior Approval required Prior Approval required
Capital Market Trade / F & O Operations Capital Market Trade/ F &O operations Investigation
Prior to commencement of trading for a client
One time / need based submissions
Prior Approval required
Membership
ANNUAL COMPLIANCE REPORT FOR CAPITAL MARKET SEGMENT COMPLIANCE CHECKLIST FOR NSE TRADING MEMBERS Sr. No. 1 Rule/Bye Law / Regulation/ circular Particulars of the Exchange Books of Accounts, Records and Documents Regulation 6 of the Regulations of All Books of accounts, registers and records as the Exchange required under the regulations and showing exchange-wise segregation of transactions are being maintained and preserved for the prescribed period in respect of the Head office and branches Regulation 6.1.3A (e) of the Register of Securities, client wise and Regulations of the Exchange and security wise, giving inter alia the Exchange's circular no. following has been maintained NSE/INSP/2004/28 (download ref. (a) date of receipt / delivery of security no. NSE/INSP/4986) dated 16th (b) quantity received / delivered April 2004 (c) party from whom received / to whom delivered (d) purpose of receipt / delivery Regulation; 4.3.1 of the Regulations of the Exchange and Exchange's circular no. NSE/INSP/2004/31 (download ref. no. 1NSE/INSP/5387) dated 27th August 2004 M em b e r C on s t i t u e n t Agreements, containing all provisions specified by the Exchange, have been entered into with all the active constituents, before accepting or placing orders on their behalf.
Exchange's circular no. Whether mandatory and voluntary NSE/INSP/7657 dated July 5, 2006 documents/ clause are segregated in the client registration docket 9
Exchange's circular no. Agreements entered NSE/CMO/0009/2000 (download ref. internet trading no. NSE/CMT/1532) dated 16th March 2000
with
clients
for
Exchange's circulars no. 55 dated Client registration forms in respect of all active (download reference no. clients completed in all respects with necessary NSE/MEMB/0245) 2nd May supporting documents have been obtained 1 9 9 7 a n d n o . NSE/INSP/2004/31 (download reference no. 1NSE/INSP/5387) dated 27th August 2004 Regulation 3.14 of Capital Market Whether trading member has obtained PAN in trading regulations, circular respect of all active clients NSE/INVG/2006/7673 dated July 13, 2006, circular no. NSE/INVG/2006/7944 dated September 28, 2006 and circular NSE/INVG/2006/8056 dated October 27, 2006 Exchange's circulars no. All constituents have been issued a copy of the NSE/CMO/0060/2003 (download Risk Disclosure Document as specified by the reference no. NSE/CMTR/4468) Exchange. dated 8th October 2003 and no. NSE/INSP/2004/31 (download reference no. 1NSE/INSP/5387) dated 27th August 2004 Banking Operations Regulation 6.1.5 of Regulations of the Exchange the Books of accounts, as are necessary, to show and distinguish, client funds and own funds in connection with our business as Trading Member of the Exchange have been maintained. the Funds of the constituents have always been kept in a separate account and operation of such account has been as per provisions of Regulation 6.1.5 the No transfer / withdrawal from clients' account is made except under the circumstances enumerated in Regulation 6.1.5 the Funds/ securities of constituents have not been improperly used by us or any person associated with us. the Brokerage has been charged separately and indicated separately, in the contract note.
Regulation 6.1.5 of Regulations of the Exchange
Regulation 6.1.5 (c) of Regulations of the Exchange
Dealings With Clients 1 Regulation 4.5.3 (e) of Regulations of the Exchange Regulation 3.6.3 of Regulations of the Exchange
2 3
Regu lation 3.6.2 of the Brokerage has always been charged at rate not Regulations of the Exchange and exceeding the rate prescribed i.e.2.5% Exchange's circular no. NSE/CMT/001 dated 28th October 1994.
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the Full payment of funds / full delivery of securities has been made to all constituents within one working day of receiving the relevant pay out from the Exchange Statement of accounts for funds / securities (with error reporting clause) has been sent to all the clients, with periodicity not exceeding three months
Regulation 6.1.5 (d) of the Regulations of the Exchange and Exchange's circular no. NSEIL/LEGAL/6806 dated 24th October 2005 Exchange's circular no. NSE/INVG/2002/3690 dated 18th October 2002
R egu la t ion 6.1 .4 of Regulations of the Exchange
Unique client codes have been allotted to all clients and the correct client codes have been entered in the system while placing orders on behalf of clients which have been correctly mapped to the back office accounts. Client details as required have been maintained and have been provided to the Exchange / Clearing Corporation as required. th e Mapping of the client codes used at the time of order entry in the trading system with unique code codes is maintained as prescribed by the Exchange UIN under MAPIN database has been used as unique client code in respect of all specified intermediaries and their related persons and corporate clients No cash dealings are undertaken
Exchange's circular no. NSE/INVG/2004/010. (Download reference no. NSE/INVG/2004/ 5271) dated 20th July 2004 and NSE/MEM/5338 dated 17th August 2004 Exchange's circular no. NSE/INSP/2003/21 (download reference no. NSE/INSP/4377) dated 1st September 2003)
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Exchange's circular no. Pay-in of funds and securities due from clients NSE/INSP/2003/21 (download are received from the respective clients only reference no. NSE/INSP/4377) dated 1st September 2003) Exchange's circular no. Payout of funds and securities due to the clients NSE/INSP/2003/21 (download are made to the respective clients only reference no. NSE/INSP/4377) dated 1st September 2003) Regulation 6.1.5 (f) of Regulations of the Exchange Regulation 6.1.5 (f) of Regulations of the Exchange the Separate beneficiary account exclusively to be opened for holding the securities of the constituents the Securities of the constituents have always been kept in a separate constituent beneficiary demat account and operation of such account has been as per provisions of Regulation 6.1.5(f) done through unregistered
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Dealing with Intermediaries 1 Exchanges circulars no. No dealings are NSE/MEMB/0275 dated 12th June intermediaries. 1997 and no. 185 (download reference no. NSE/MEMB/2284) dated January 31, 2001
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2.
Clause 33 (a) of Chapter IX of Brokerage has not been shared with another Byelaws of the Exchange Trading Member of the Exchange or an employee of another Trading Member or a person with whom Trading Members are forbidden to do business under the Rules, Bye Laws and Regulations of the Exchange. Clause 33 (a) of Chapter IX of Brokerage has been shared only with registered Byelaws of the Exchange and sub brokers. Exchanges circulars no.333 (download reference no.NSE/MEM/4082) dated 10th April 2003 and no.485 (download reference no.NSE/MEM/6378)dated 14tgh July 2006 Rule 5(e) of Chapter IV of Rules of Brokerage has not been shared with and/or the Exchange business has not been transacted with any of the suspended or expelled or defaulting Trading Members Exchanges circulars no.NSE/MEM/275 dated 12/06/1997 and NSEIL/INSP/3685 dated17/10/2002 At least 10%of the active sub-brokers/10% of the active branches are inspected every year and each active sub-broker/branch is inspected at least once in every five years, to ensure that the sub-brokers/branches function and conduct themselves in accordance with SCRA, 1956, SCRR,1957, SEBI Act, Rules, Byelaws, Regulations etc. of the Exchange / NSCCL Rule 5 of Chapter IV of the Rules of No business has been done with or for the the Exchange trading members who are prohibited to transact, including suspended/expelled/defaulter trading members; defaulting constituents and employees of other trading members Contract Notes Regulation 3.5.1, 3.5.2 and 3.5.3 of the Regulations of the Exchange and Exchanges circulars no. NSE/CMT/001 dated 28th October 1994; no.NSE/CMT/005 dated 12th December 1994 and no.NSEIL/LEGAL/7036 dated 5th January 2006 and NSE/INSP/7330 dated 30/03/2006 Contract notes have been issued to all constituents within 24 hours of execution of contract in the prescribed format, with all relevant details filled in, bearing signature of the authorized signature, bearing a running serial number which is initiated at the beginning of each financial year
1.
2 3
Regulation 6.1.17 of the Regulations Copies / duplicates of Contract Notes issued by of the Exchange the Trading Member are maintained. Exchanges circular no.NSE/CMO/003/2001 (download reference no.NSE/CMT/2279) dated 30th January, 2001 Contract Notes are authenticated by digital signatures only after obtaining digital signature certificate from a Certifying Authority under the IT Act, 2000 and more of confirmation by the client is specified in the agreement between the member and the client. Exchanges circular no. Whether client has specifically consented to NSE/INSP/2005/41 (download receive the electronic contract note (ECN) reference no.NSE/INSP/6623) dated 9th September 2005
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Exchanges circular Log report for Proof of delivery of ECN and no.NSE/INSP/2005/41 (download rejected or bounced mails to be maintained reference no. NSE/INSP/6623) dated 9th September 2005 Exchanges circular no. Physical copy of contract note to be sent where NSE/INSP/2005/41 (download ECN could not be delivered reference no. NSE/INSP/6623) dated 9th September 2005 Exchanges circular no. Simultaneously publish the ECN on its website NSE/INSP/2005/41 (download and provide secured access to the respective reference no. NSE/INSP/6623) dated client 9th September 2005 Exchanges circular no. No off market deals have been executed NSE/CMO/22/99 (download reference no. NSE/CMT/1230) dated 8th October 1999 NSCCL circular NSCC/CM/C&S/207 dated August, 2001 no. Trades executed for a constituent have not been 31st subsequently transferred to another constituent
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NSCCL circular no. Trades executed for own account have not been NSCC/CM/C&S/207 dated 31 August, subsequently transferred to a constituent and 2001 vice versa Exchange's circular no. NSE/INVG/2003/4601 dated 28th November 2003 Exchange's circular no. NSE/INVG/2004/009 (download reference no. NSE/INVG/2004/ 5216) dated 30th June 2004 Trades on own account have been executed under PRO code only All Institutional trades have been routed through STP system and the prescribed identification codes for transactions routed through STP system have been used
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Risk Management System 1 NSE/CMPT/5868 dated February 24, 2005 Whether a system of risk management to protect from client default is in place. Whether margins is an important element of such a risk management system. Whether risk management system is well documented and was made accessible to the clients and the Stock Exchanges.
NSE/CMPT/5868 dated February 24, 2005
Membership Requirements Exchange's circular no. 56 We have not engaged in any fund based activities. (download reference no. NSE/ MEMB/261) dated 27th May '97 Exchange's circular no. Not involved in financing clients direct!}7 or NSE/INSP/2005/42 (download indirectly except in accordance with the reference no. NSE/INSP/6938) provisions of Margin Trading facility dated 9th December 2005
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Exchange's circular no. 68 (download reference no. NSE/MEM/00310 dated 23rd J u l y 1 9 9 7 a n d t h e Membership Undertaking
No change in share holding / profit sharing pattern of the corporate / firm has been undertaken without prior approval of the Exchange.
Exchange's circular no. 355 No change in directors / partners of the (download reference no. corporate / firm has been undertaken without NSE/MEM/4299) dated 25th July prior approval of the Exchange. 2003 Rule (5)(h) of Chapter IV of the No advertisements have been released for Rules of the Exchange business purposes without prior approval of the Exchange. Bye Law 7 of Chapter VII of the Bye We have not acted through or on behalf of laws and Regulation 2.1.11 of the another trading member/sub broker either for Regulations of the Exchange proprietary trading or for trading on behalf of clients without the prior approval of the Exchange in writing Regulation 2.1.12 of Regulations of the Exchange Regulation 2.1.12 of Regulations of the Exchange the We have not dealt with more than one broker / sub-broker of another Exchange for the Our dealing with a broker / sub-broker of another Exchange for proprietary trading has been done after intimating the name of such broker / sub-broker to the Exchange the Dealings on behalf of constituents with a broker of another Exchange has been done only after necessary registration as a sub-broker Office Management
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Exchange's circular no. 163 Trading terminals are operated by the (download reference no. NSE/ respective approved users / approved MEM/1591 dated 20th April 2000 persons only. Exchange's circulars no. 163 Neat terminals have not been extended / CTCL (download reference no. NSE/ terminals have not been installed without the MEM/1591 dated 20th April 2000; approval of the Exchange. no. 282 (download reference no. NSE/MEM/3574) dated 29th August 2002; no. 292 (download reference no. NSE/MEM/3635) dated 25th September 2002; no. 435 (download reference no. NSE/MEM/5664) dated 15th December 2004 and all related circulars issued w.r.t. the same
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Exchange's circulars no. 163 (download reference no. NSE/ MEM/1591 dated 20th April 2000; no. 282 (download reference no. NSE/MEM/3574) dated 29th August 2002; no. 292 (download reference no. NSE/MEM/3635) dated 25th September 2002; no. 435 (download reference no. NSE/MEM/5664) dated 15th December 2004 and all related circulars issued w.r.t. the same Exchange circulars no. 163 (download reference no. NSE/MEM/1591) dated 20th April 2000 and no. 501(download reference no. NSE/MEM/6706) dated 28/09/2005. Exchange's circular no. 163 (download reference no. NSE/ M E M / 1 5 9 1 ) d a t ed . 2 0 t h A p r i l 2000 Exchange's circular no NSE/CMTR/4460 dated 3rd October 2003
The required information in respect of all the CTCL terminals (including view only / admin / test / etc ) have been uploaded to the Exchange
Notice board as prescribed by the I Exchange has been displayed at a prominent place in the main office and branch offices and the registered subbrokers' offices. Copy of registration certificate issued by SEBI is displayed at the main office Own trading is carried out at permitted locations only. Trades on own account have been executed under PRO code only. trades not earmarked executed through for executing PRO
Exchange's circular no Client NSE/CMTR/4460 dated 03/10/ 2003 terminal trades
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Exchange's circular no. NSE/ Own trading, if any has been disclosed to the INVG/2003/4590 dated 25/11/2003 clients Exchange's circular no. 309 (download reference no. NSE/MEM/3740 dated. 13/11/2002; NSE/MEM/7992 dated 10/10/2006 Regulation 2.2.8 (d) of the Regulations of the Exchange Regulation 2.2.15 of Regulations of the Exchange Regulation 2.2.16 of Regulations of the Exchange Whether all the NEAT/ CTCL approved users/ approved persons are NCFM certified as required by the Exchange No former trading member or a user of such trading member has been appointed as a user by us without the approval of the Exchange.
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the Trading system of the Exchange has not been accessed through any other trading member or any other user id not allotted to us the We have not aided nor facilitated to access the trading system from a location other than our approved location, without the approval of the Exchange t h e No activity connected to or pertaining to our operations as Trading Member of the Exchange has been carried on in any office or premises without intimating to the Exchange the full address of such office or premises with details of the activity proposed to be carried on therein and the person in whose supervision and control it is to be so carried on. 15
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R eg u l a t i o n 4.1.1 of Regulations of the Exchange
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Exchanges circular no Data feed made available by the Exchange is NSE/CMT/4525 dated 31/10/2003 used essentially for building tools for analysis, risk management and decision support for our own trading activities and it has not been used for any commercial purposes. The feed has not been used to provide input for any software outside our premises and not been made available to anv other entitv even as view terminals. Exchange's circular no. Met with compliances with respect to dealings NSE/INSP/2005/39 (download by branches, intermediaries etc. reference no. NSE/INSP/6334) dated 06/07/2005 Margin Trading Exchange's circular no. 396 (Download reference no. NSE /MEM/4973) dated 07/04/ 2004 Exchange's circular no. 395 (download reference no. NSE /MEM/4972) dated 07/04/2004 Margin trading facility has been provided to the clients only after obtaining prior permission of the Exchange Agreements, containing all provision specified by the Exchange, have been entered into with all the constituent availing margin trading facility.
Exchange's circular no. 395 Declaration from clients, giving details of margin (download reference no. NSE/ trading facility availed from any broker in any MEM/4972) dated 07/04/2004 exchange / rejection of the client's request for margin trading with any broker / etc. has been obtained Exchange's circulars no. 395 Unique Identification Number under MAPIN (download reference no. database has been obtained in respect of NSE/MEM/4972) dated 7th A p r i l clients availing margin trading facility 2004 and no. NSE/CMO/0103/2004 (download reference no. NSE/CMTR/4974) dated 7th April 2004 Exchange's circular no. 395 Separate demat account for every client for (download reference no. holding client wise securities purchased under NSE/MEM/4972) dated 7th April margin trading facility has been maintained and 2004 the clients are able to observe the movement of securities from his / her demat account through internet Exchange's circular no. 395 Separate record of details (including the sources (download reference no. ) of funds used for the purpose of margin trading NSE/MEM/4972) dated 7th April has been maintained 2004 Exchanges circular no. 395 Margin trading facility has been provided using (download reference no. own funds and / or borrowings from scheduled NSE/MEM/4972) dated 7th April commercial banks and NBFC's regulated by RBI 2004 Exchange's circular no. 395 Total indebtedness for the purpose of margin (download reference no. trading does not exceed 5 times of our net NSE/MEM/4972) dated 7th April worth, calculated as prescribed by SEBI 2004
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Exchange's circular no. 395 Funds belonging to any client has not been used (download reference no. to provide margin trading facility to another NSE/MEM/4972) dated 7th April client even if authorized by the client 2004 Exchange's circulars no. 395 (download reference no. NSE/MEM/4972) dated 7th A p r i l 2 0 0 4 a r i d n o . 4 5 9 (download reference no. NSE/MEM/5917) dated 11th March 2005 Adequate initial margin and maintenance margin in cash or cash equivalents has been collected from the clients availing margin trading facility.
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Exchange's circular no. 395 Maximum allowable exposure for margin trading (download reference no. does not exceed the borrowed funds plus 50% of NSE/MEM/4972) dated 7th April our net worth. 2004 Exchange's circular no. 395 Exposure to any single client at any point of (download reference no. time does not exceed 10% of the lendable NSE/MEM/4972) dated 7th April resource. 2004 Exchange's circulars no. 395 Margin trading facility has been provided to the (download reference no. clients only in securities specified from time to NSE/MEM/4972) dated 7th time A p r i l 2 0 0 4 ; n o . NSE/CMO/0131/2004 (download reference no. NSE/CMTR/5420) dated 9th September 2004 and no. NSE/CMO/0183/2005 (download reference no. NSE/CMTR/5914) dated 10th March 2005 Others Exchange's circular no NSE/ Compliance officer has been appointed MEM/3441 dated 14th June 2002 Exchange's circular no NSE/INSP/2003/18 (download reference no. NSE/ INSP/4225) dated 26th June 2003 Exchange's NSE/CMPT/2241 January 2001 circular dated No t r a de in sec ur it ie s o ut s id e th e established trading system of the recognized stock exchanges by taking share prices disseminated on-line by the Exchange as reference prices has been done no Trades done for non institutional clients have 16th not been reported as NCIT trades the After the closing of any constituents account all records which relate to the terms and conditions with respect to the opening and maintenance of such account, date of entering into agreement with the constituents, date of modification thereof, date of termination and representatives of such constituents who signed in each case are being maintained for a period of not less than six years. t h e Records of all relevant particulars of persons who are approved as users by the Exchange have been maintained. 17
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Regulation 4.2.l(c) of Regulations of the Exchange
the All persons who are transacting on our behalf have been specifically authorized in writing to do so and such power of attorney has been made available to the Exchange before such person transacts any business on the Exchange t h e Internal review of our business, to assist in detecting and preventing violations of and achieving compliance with Rules, Bye Laws and Regulations of the Exchange, has been undertaken. the Record of all written complaints of constituents showing the name and reference number of constituent, date, particulars of the complaint, action taken by us and if the matter is referred to arbitration to the Exchange, the particulars thereof, etc. have been maintained t h e Management of discretionary accounts for and on behalf of constituents has been done as per provisions of SEBI (Portfolio Managers) Rules and Regulations, 1993 in this regard no. Underwriting commitments as per the no. provisions of Securities and Exchange Board 15th of India (underwriting) Rules and Regulations, are adhered to We have provided Internet trading facility t o t h e c l i e n t s a f t e r o b t a i n i n g p r i o r approval of the Exchange and complied with all other applicable provisions including periodic uploads to the exchange related to internet trading
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Exchange's NSE/CM/6768 NSE/CMT/055 February 1996
circulars and dated
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Exchange's circular no. NSE/CMO/002/2000 (download reference no NSE/CMT/1424) dated 31st January 2000
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Exchange's circulars no. Principal officer has been appointed NSE/INVG/2006/09 (download reference no. NSE/INVG/2006/ 7102) dated 25th January 2006 and no. NSE/INVG/2006/33 dated 24th March 2006 Exchange's circulars no. Adopted written procedures to implement the NSE/INVG/2006/09 (download anti money laundering provisions as envisaged reference no. NSE/INVG/2006/ under the- Anti Money Laundering Act, 2002 7102) dated 25th January 2006 and no. NSE/INVG/2006/33 dated 24th March 2006
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Exchange's circular no. The client information periodically reviewed NSE/INVG/2006/31 (download and updated on an ongoing basis in view of the reference, no. NSE/INVG/2006/ current trading activity of the client. 7236) dated 3rd March 2006 Exchange's circular no. Th e client NSE/INVG/2006/31 (download reviewed to reference, no. NSE/INVG/2006/ accuracy. 7236) dated 3rd March 2006 NSE/MEMB/C/20070565 download ref no. NSE/MEMB/8352 dated January 09, 2007 database ensure its is periodic ally completeness and
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Whether an exclusive email ID to to enable the investors to register their complaints is designated
ANNUAL COMPLIANCE REPORT FOR FUTURES AND OPTIONS SEGMENT Sr. No. 1 Rule/Bye Law / Regulation/ circular Particulars of the Exchange Books of Accounts, Records and Documents Regulation 6 All Books of accounts, registers and records as required under the regulations and showing, exchange-wise segregation of transactions are being maintained and preserved for the prescribed period in respect of the Head office and branches
Regulation 17(1) of SEBI (Stock Register of Securities, client wise and security brokers and sub-brokers) wise, giving inter alia the following has Regulations 1992 and the been maintained a) date of receipt / delivery Exchange's circular no. of security b) quantity received / delivered c) NSE/INSP/2004/28 (download party from whom received / to whom reference no. NSE/INSP/4986) delivered d) purpose of receipt / delivery dated 16th April 2004 Regulation 4.3.1 of Regulations of the Exchange t h e Member Constituent Agreements, containing all provisions specified by the Exchange, have been entered into with all the active constituents, before accepting or placing orders on their behalf.
Exchange's circular no. Whether mandatory and voluntary documents/ NSE/INSP/7657 dated July 5, clause are segregated in the client registration 2006 docket Exchange's circular no. Agreements entered NSE/F&O/005/2000 (download internet trading reference no NSE/ F&O / 1877) dated 24th August 2000 Regulation 4.3.2 of Regulations of the Exchange with clients for
t h e Client registration forms in respect of all active clients completed in all respects with necessary supporting documents have been obtained
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t h e Approved board resolutions permitting trading in derivatives from non-individual constituents have been obtained
Exchange's circular no. Whether trading member has obtained PAN NSE/INVG/2005/6690 dated in respect of all active clients September 23, 2005 and circular NSE/INVG/2006/8056 dated October 27, 2006 Regulation 4.3.3 of Regulations of the Exchange t h e All constituents in the F&O segment of the Exchange have been issued a copy of the Risk Disclosure Document as specified by the Exchange Banking Operations
Regulation 6.1.6.1 of Regulations of the Exchange
the Books of accounts, as are necessary, to show and distinguish, client funds and own funds in connection with our business as Trading Member of the Exchange have been maintained. the Funds of the constituents have always been kept in a separate account and operation of such account has been as per provisions of Regulation 6.1.5 the No transfer / withdrawal from clients' account is made except under the c i r c u m s t a n c e s e n u m e r a t e d i n Regulation 6.1.6.2
Dealings With Clients 1 Regulation 4.5.3 (e) of Regulations of the Exchange Regulation 3.6.1 of Regulations of the Exchange the Funds/ securities of constituents have not been improperly used by us or any person associated with us. t h e Brokerage has been charged separately a n d i n d ic a t ed s ep a r a t e ly , i n t h e contract note.
Circular no NSE/F&O/1688 Brokerage has always been charged at rate not dated 08/06/2000 a n d exceeding the rate prescribed i.e. 2.5% NSE/F&O/2596 dated 05/06/2001 Exchange's circular NSE/FAOP/5978 dated March 2005 Regulation 4.4.15 of Regulations of the Exchange no. Brokerage on option contracts is charged 30th only on premium (traded price) the Full payment of funds has been made to all constituents within 1 working day of receiving the relevant pay out from the Exchange Statement of accounts for settlements and margins funds and securities (with error reporting clause) has been sent to all the clients, with periodicity not exceeding three months
Exchange's circular no. NSCC/F&O/C&S/132 dated 8th October 2002 and circular no.NSEIL/LEGAL/7410 dated 04/21/2006
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Exchange's circular NSE/INVG/2002/3690 18th October 2002
no Unique client codes have been allotted to all dated clients and the correct client codes have been entered in the system while placing orders on behalf of clients which have been correctly mapped to the back office accounts. Client details as required have been maintained and have been provided to the Exchange / Clearing Corporation as required t h e Mapping of the client codes used at the time of order entry in the trading system with unique code codes is maintained as prescribed by the Exchange
Exchange's circulars no UIN under MAPIN database has been used as NSE/INVG/2004/5271 dated unique client code in respect of all specified 20th July 2004 and no. intermediaries, their related persons and NSE/MEM/5338 dated 17th corporate clients August 2004 Exchange's circular NSE/INVG/2005/6690 23rd September 2005 Exchange's circular NSE/INSP/4377 dated September 2003 Exchange's circular NSE/INSP/4377 dated September 2003 Exchange's circular NSE/INSP/4377 dated September 2003 Regulation 6.1.6.2 (v) of Regulations of the Exchange no Copy of PAN card has been obtained from all dated the clients and verified with the original no No cash dealings are undertaken 1st no Pay-in of funds due from clients is received 1st from the respective clients only no Payout of funds due to the clients is made to 1st the respective clients only the C on s t it u e n t b e n e f ic i a r y a c c o u n t opened for holding the securities of the constituents exclusively
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Regulation 6.1.6.2 (v) (a), (b) and Securities of the constituents have always (c) of the Regulations of the been kept in a separate constituent Exchange beneficiary demat account and operation of such account has been as per provisions of Regulation 6.1.6.2 (v) (a), (b) and (c) Dealings with Intermediaries
Clause 12 (l) of SEBI Act, 1992
No dealings are done through any un registered intermediary
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Bye Law 33(a) of Chapter IX of the Bye laws of the Exchange and Exchange's circulars no. 333 (download reference no. NSE/MEM/4082) dated 10th April 2002 and no. 485 (download reference no. NSE/MEM/6378) dated 14th July 2005
Brokerage has not been shared with another Trading Member of the Exchange or an employee of another Trading Member or a person with whom Trading Members are forbidden to do business under the Rules, Bye Laws and Regulations of the Exchange.
Bye Law 33(a) of Chapter IX of the Brokerage has been shared only with Authorized Bye laws of the Exchange and Persons Exchange's circulars no. 333 (download reference no. NSE/MEM/4082) dated 10th April 2002 and no. 485 (download reference no. NSE/MEM/6378) dated 14th July 2005
Rule 5(e) of Chapter IV of Rules of Brokerage has not been shared with a n d / o r the Exchange b u s i n e s s h a s n o t b e e n transacted with any of the suspended or expelled or defaulting Trading Members Rule 5 of chapter IV of the Rules of No business has been done with or for t h e the Exchange t r a d i n g m e m b e r s w h o a r e prohibited to transact, including suspended/expelled/ defaulter trading membersdefaulting constituents and employees of other trading members Contract Notes
Regulation 3.6 of the Regulations of the Exchange and Exchanges circular no.NSEIL/LEGAL/7037 dated 05/01/2006 and no.NSE/INSP/329 dated 30/03/2006
Contract notes have been issued to all c o n s t i t u e n t s w i t h in 2 4 h o u r s o f execution of contract in the prescribed format, with all relevant details filled in, bearing signature of the authorized signatory bearing a running serial number which is initiated at the beginning of each financial year
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the Copies/ duplicates of Contract Notes issued by the Trading Member are maintained. Contract Notes are authenticated by digital signatures only after obtaining digital signature certificate from a Certifying Authority under the IT Act, 2000 and mode of confirmation by the client is specified in the agreement between the member and the client
Exchange's circular no. NSE/CMO/003/2001 (download reference no. NSE/CMT/2279) dated 30th January 2001
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Exchanges circular no. Whether client has specifically consented to NSE/INSP/2005/41 (download receive the electronic contract note (ECN) reference no. NSE/INSP/6623) dated 9th September 2005 Exchanges circular no. Log report for Proof of delivery of ECN and NSE/INSP/2005/41 (download rejected or bounced mails to be maintained. reference no. NSE/INSP/6623) dated 9th September 2005 Exchanges circular no. Physical copy of contract note to be sent NSE/INSP/2005/41 (download whether ECN could not be delivered reference no. NSE/INSP/6623) dated 9th September 2005 Exchanges circular no. Simultaneously publish the ECN on its website NSE/INSP/2005/41 (download and provide secured access to the respective reference no. NSE/INSP/6623) client. dated 9th September 2005 Regulation 3.6.1 of the Regulations No off market deals have been executed of the Exchange Regulation 3.6.1 of the Regulations Trades executed for a constituent have not of the Exchange been subsequently transferred to another constituent Regulation 3.6.1 of the Regulations Trade executed for own account have not been of the Exchange subsequently transferred to a constituent and vice versa Exchanges circular NSE/INVG/2003/4601 dated November 2003 no. Trades on own account have been executed 28th under PRO code only Margins
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NSCCL circular NSCC/F&O/C&S/97 dated February 2002
no. Margins due and collected from the 1st constituents have been reported to NSCCL correctly
Membership Requirements 1 Exchanges circular no. (download reference NSE/MEMB/261) dated 27th 1997 56 We have not no. activities May engaged in any fund based
Exchanges circular no.68 (download reference no. rd NSE/MEM/00310 dated 23 July 1997) and the Membership Undertaking Exchanges circular no. (download reference NSE/MEM/4299) dated 25th 2008
No change in share holding / profit sharing pattern of the corporate / firm has been undertaken without prior approval of the Exchange.
355 No change in directors / partners of the no. corporate / firm has been undertaken without July prior approval of the Exchange.
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Rule (5)(h) of Chapter IV of the No advertisements have been released for Rules of the Exchange business purposes without prior approval of the Exchange. Bye Law 7 of Chapter VII of the Bye We have not acted through or on behalf of laws and Regulation 2.1.16 of the another trading member for trading on the R egu la t ion s of th e Exchange Exchange either for proprietary trading or for trading on behalf of clients without the prior approval of the Exchange in writing Regulation 2.1.16 of Regulations of the Exchange Regulation 2.1.16 of Regulations of the Exchange the We have not dealt with more than one trading member of another Exchange for proprietary trading the Our dealing with a trading member of another Exchange for proprietary trading has been done after intimating t h e n a m e o f s u c h b r o k e r t o t h e Exchange the We have not dealt with one or more trading member of another exchange on behalf of constituents Office Management
Exchanges .circular no. 163 Trading terminals are operated by the (download reference no. NSE/ respective approved users / approved persons MEM/1591 dated 20th April 2000 only Exchange's circulars no. 163 Neat terminals have not been extended / CTCL (download reference no. NSE/ terminals have not been installed without the MEM/1591 dated 20th April approval of the Exchange. 2000; no. 282 ( d o w n lo a d reference no. NSE/MEM/3574) dated 29th August 2002; no. 292 (download reference no. NSE/MEM/3635) dated 25th September 2002; no. 435 (download reference no. NSE/MEM/5664) dated 15th December 2004 Exchange's circulars no. 163 The required information in respect of all the (download reference no. NSE/ CTCL terminals (including view only / admin / MEM/1591 dated 20th April test / etc ) have been uploaded to the Exchange 2000; no. 282 ( d o w n lo a d reference no. NSE/MEM/3574) dated 29th August 2002; no. 292 (download reference no. NSE/MEM/3635) dated 25th September 2002; no. 435 (download reference no. NSE/MEM/5664) dated 15th December 2004
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Exchange's circulars no. 163 Notice board as prescribed by the (download reference no. Exchange has been displayed at a NSE/MEM/1591 dated 20th prominent place in the main office and branch April 2000 and no. 5 0 1 offices (download reference no. NSE/MEM/6706) dated 28th September 2005 Exchange's circular no. 163 Copy of registration certificate issued by SEBI is (download reference no. displayed at the main office NSE/MEM/1591 dated 20th April 2000 Exchange's circular N SE / F &O / 4 4 64 dat e d October 2003 Exchange's circular N SE / F &O / 4 4 64 dat e d October 2003 Exchange's. circular NSE/INVG/2003/4590 25th November 2003 no Own trading is carried out at permitted locations 3 rd only. Trades on own account have been executed under PRO code only. no Client trades not executed through terminal 3 rd earmarked for executing PRO trades no Own trading, if any has been disclosed to the dated clients the All NEAT / CTCL users are NCFM certified the No former trading member or a user of such trading member has been appointed as a user by us without the approval of the Exchange. the Trading system of the Exchange has not been accessed through any other trading member or any other user id not allotted to us the We have not aided nor facilitated to access the trading system from a location other than our approved location, without the approval of the Exchange t h e No activity connected to or pertaining to our operations as Trading Member of the Exchange has been carried on in any office or premises without intimating to the Exchange the full address of such office or premises with details of the activity proposed to be carried on therein and the person in whose supervision and control it is to be so carried on.
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Regulation 2.2.10 (e) of Regulations of the Exchange Regulation 2.2.10 (d) of Regulations of the Exchange
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Exchange's NSE/FO/4526 October 2003
circular dated
n o Data feed made available by the Exchange 3 1 s t is used essentially for building tools for analysis, risk management and decision support for our own trading activities and it has not- been used for any commercial purposes. The feed has not been used to provide input for any software outside our premises and not been made available to any other entity even as view terminals.
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Exchange's circular no. Met with compliances with respect to dealings by NSE/INSP/2005/39 (download branches, authorized persons etc., reference no. NSJE/INSP/6334) dated 6th July, 2005 Others
Exchange's MEM/3441 2002
circular no. dated 14th
NSE/ Compliance officer has been appointed June
Exchange's circular no. NSE/ No trade in securities outside the established INSP/4225 dated 26th June 2003 trading system of the recognized stock exchanges by taking share prices disseminated on-line by the Exchange as reference prices has been done Regulation 6.1.13 of the Regulations of the Exchange After the closing of any constituents account all records which relate to the terms and conditions with respect to the opening and maintenance of such a c c o u n t , d a t e o f entering into agreement with the constituents, date of modification thereof, date of termination and representatives of such constituents who signed in each case are being maintained for a period of not less than six years.
Regulation 6.1.9 of the Records of all relevant particulars of persons Regulations of the Exchange who are approved as users by the Exchange have been maintained. Regulation 4.2.1 of the An internal record of the names of all the Regulations of the Exchange people who are designated as supervisory personnel and the date from which such designation is or was effective have been maintained. Regulation 4.2.1. of the All persons who are transacting on our behalf Regulations of the Exchange have been specifically authorized in writing to do so and such power of attorney has been made available to the Exchange before such person transacts any business on the Exchange Regulation 4.2.2 of the Internal review of our business, to assist in Regulations of the Exchange detecting and preventing violations of and achieving compliance with Rules, Bye Laws and Regulations of the Exchange, has been undertaken.
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Regulation 6.1.16 of the Record of all written complaints of constituents Regulations of the Exchange showing the name and reference number of constituent, date, particulars of the complaint, action taken by us and if the matter is referred to arbitration to the Exchange, the particulars thereof, etc. have been maintained. Regulation 4.4.3 of the Management of discretionary accounts for and Regulations of the Exchange on behalf of constituents has been done as per provisions of SEBI (Portfolio Managers) Rules and Regulations, 1993 in this regard. Exchanges circular no. NSE/F&O/005/2000 (download reference no NSE/F&O/1877) dated 24 t h August 2000 Exchange's circulars no. NSE/INVG/2006/09 (download reference no. NSE/INVG/2006/ 7102) dated 25th January 2006 and no. NSE/INVG/2006/33 dated 24th March 2006 Exchange's circulars no. NSE/INVG/2006/09 (download reference no. NSE/INVG/2006/ 7102) dated 25th January 2006 and no. NSE/INVG/2006/33 dated 24th March 2006 Exchange's circular no. NSE/INVG/2006/31 (download reference, no. NSE/INVG/2006/ 7236) dated 3rd March 2006 Exchange's circular no. NSE/INVG/2006/31 (download reference, no. NSE/INVG/2006/ 7236) dated 3rd March 2006 We have provided Internet trading facility to the clients after obtaining prior approval of the Exchange and complied with all other applicable provisions including periodic uploads to the exchange related to internet trading. Principal officer has been appointed
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Adopted written procedures to implement the anti money laundering provisions as envisaged under the Anti Money Laundering Act, 2002
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The client information periodically reviewed and updated on an ongoing basis in view of the current trading activity of the client. The client database is periodically reviewed to ensure its completeness and accuracy.
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NSE/MEMB/C/20070565 download Whether an exclusive e-mail ID to enable the ref no. NSE/MEMB/8352 dated investors to register their complaints is January 09. 2007 designated Annual Compliance Report for Wholesale Debt Market Segment
Sr. No.
Rule/ Bye Law/Regulation/ circular of the Exchange
Particulars
Books of Accounts, Records and Documents 1 Regulation 8 of the Regulations of the Exchange All Books of accounts and records as required under the regulations and showing exchange wise segregation of transactions are being maintained in respect of the Head office and branches
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Regulation 4.3.1 and 4.3.2 Regulations of the Exchange
of the Member Constituent Agreements, containing all provisions specified by the Exchange, have been entered into with all the active constituents, before accepting or placing orders on their behalf. Client registration forms in respect of all active clients completed in all respects with necessary supporting documents have been obtained Whether mandatory and voluntary documents/ clause are segregated in the client registration docket Extracts of relevant provisions governing the rights and obligations of constituents, relevant manuals, notifications, circulars, any additions or amendments thereto, etc, of the Exchange, or of any regulatory authority, to the extent it governs the relationship between Trading Members and constituents, have been provided to the constituents at no extra cost.
Exchange's circular no. NSE/INSP/7657 dated July 5, 2006 R e g u l a t i o n 4 . 3 . 4 o f the Regulations of the Exchange
Regulation 3.2.1 of the Regulations of Confirmed order instructions have been the Exchange obtained from the constituents before placing the order on the system. Regulation 4.4.6 of the Regulations of Order modification/ cancellation the Exchange instructions been obtained in writing from the constituents. Regulation 3.2.2 of the Regulations of Order Confirmation/ modification/ cancellation the Exchange slips or copies there of have been provided to constituents. Regulation 4.4.13 of the Regulations All constituents have been provided with a trade of the Exchange confirmation slip as generated on the Trading system. on execution of a trade. Dealing with Clients
1 2 3
Regulation 3.6.2 of the regulations of the Exchange Regulation 3.6.3 of the Regulations of the Exchange
Brokerage has always been charged at rate note exceeding the rate prescribed. Brokerage has been charged separately and indicated separately in the contract note.
Regulation 3.6.1 of the Regulations of All the orders entered on the NEAT are always the Exchange at prices/rates exclusive of brokerage Dealing with Intermediaries
Bye Law 33(a) Chapter IX of the Bye Brokerage has not been shared with another Laws of the Exchange Trading Member of the Exchange or an employee of another Trading Member or a person with whom Trading Members are forbidden to do business under the Rules, Bye Laws and Regulations of the Exchange
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Rule 5(e) of Chapter IV of Rules of the Exchange
Brokerage has not been shared with and/or business has not been transacted with any of the suspended or expelled or defaulting Trading Members
Contract Notes 1 Regulation 4.4.13, 3.5.1 and 3.5.2 of the Regulations of the Exchange and Exchanges circular reference no. NSE/WDM/GEN/0012 dated 8th August 1994 Exchange's NSE/WDM/GEN/ June 1994 circular 0004 dated Contract notes have been issued to constituents within 24 hours of execution contract, in the prescribed format, with relevant details filled in. bearing signature the authorised signatory and bearing running serial number all of all of a
no. All Off Market deals have been reported correctly 18th to the Exchange no. Settlement of all the trades have been reported 1 s t to the Exchange
Exchange's circular NSE/WDM/GEN/ 0 0 2 2 d a t e d November 1994
Membership Requirements 1 Exchange's circular no. We have not engaged in any fund based NSE/MEMB/261 d a t e d 2 7 t h M a y activities. 1997 Exchange's circular no. 68 (download reference no. NSE/ MEM/310) dated 23rd July 1997 and the Membership Undertaking No change in share holding / profit sharing pattern of the corporate / firm has been undertaken without prior approval of the Exchange.
Bye Law 7 of Chapter VII of the Bye We have not acted through or on behalf of laws and Regulation 2.1.11 of the another trading member of the Exchange the Regulations of the Exchange prior approval of the Exchange in writing Exchange's circular no. 108 We have not dealt with more than one (download reference no. NSE/ trading member of another Exchange for WDM/4772) dated 28th January proprietary trading 2004 Exchange's circular no. 108 (download reference no. NSE/ WDM/4772) dated 28th January 2004 Our dealing with a trading member of another Exchange for proprietary trading has been done after intimating the name of such broker to the Exchange
Exchange's circular no. 108 We have not dealt with one or more trading (download reference no. NSE/ member of another exchange on behalf of WDM/4772) dated 28th January constituents 2004 Office Management Regulation 2.2.8 (d) of the No former trading member or a user of such Regulations of the Exchange trading member has been appointed as a user by us without the approval of the Exchange.
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Regulation 2.2.14 of the Regulations Trading system of the Exchange has not of the Exchange been accessed through any other trading member or any user id not allotted to us Regulation 2.2.15 of the Regulations We have not aided nor facilitated to access of the Exchange the trading system from a location other than our approved location, without the approval of the Exchange Regulation 4.1.1 of Regulations of the Exchange the No activity connected to or pertaining to our operations as Trading Member of the Exchange has been carried on in any office or premises without intimating to the Exchange the full address of such office or premises with details of the activity proposed to be carried on therein and the person in whose supervision and control it is to be so carried on.
Rule (5)(h) of Chapter IV of the Rules No advertisements have been released for of the Exchange business purposes without prior approval of the Exchange and in contravention of the advertisement code prescribed by the Exchange. Others no Compliance officer has been appointed June the No short sale of a security admitted to the dealings on the Exchange has been effected either on own account or client's account.
Exchange's NSE/MEM/3441 2002
circular dated 14th
Regulation 4.5.4 (b) of Regulations of the Exchange
Regulation 8.6 of the Regulations of Proper ledger balances to enable verification the Exchange of capital adequacy as required by NSE are maintained. Regulation 8.11 of the Regulations of After the closing of any constituent's account the Exchange all records which relate to the terms and conditions with respect to the opening and maintenance of such account, date of entering into agreement with the constituents, date of modification thereof, date of termination and representatives of such constituents who signed in each case are being maintained for a period of not less than six years. Regulation 8.7 of the Regulations of Records of all relevant particulars of persons who the Exchange are approved as users by the Exchange have been maintained. Regulation 4.2.1(b) of Regulations of the Exchange the An internal record of the names of all the people who are designated as supervisory personnel and the date from which such designation is or was effective have been maintained.
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Regulation 4.2.l(c) of the Regulations All persons who are transacting on our behalf of the Exchange have been specifically authorized in writing to do so and such power of attorney has been made available to the Exchange before such person transacts any business on the Exchange Regulation 4.2.2 of Regulations of the Exchange the Internal review of our business, to assist in detecting an d p r ev ent ing v iolat ions of a n d a ch iev ing compliance with Rules. Bye Laws and Regulations of the Exchange, has been undertaken.
Regulation 8.14 of the Regulations of Record of all written complaints of the Exchange constituents showing the name and reference number of constituent, date, particulars of the complaint, action taken by the us and if the matter is referred to arbitration to the Exchange, the particulars thereof, etc. have been maintained Regulation 4.4.3 of Regulations of the Exchange the Management of discretionary accounts for and on behalf of constituents has been done as per provisions of SEBI (Portfolio Managers) Rules and Regulations,-1993 in this regard
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NSE/MEMB/C/2007 0565 An exclusive email ID to enable the investors to download ref.no.NSE/MEMB/8352 register their complaints is designated. dated 09/01/2007 Exchange circular no. Principal offer has been appointed. NSE/INVG/2006/09 (download ref. no. NSE/INVG/2006/7102) dated 25 t h January 2006 and no. NSE/INVG/2006/33 dated 24 T H March 2006 Exchangers circular no. Adopted written procedures to implement the NSE/INVG/2006/09 (download anti money laundering provisions as envisaged ref. no. NSE/INVG/2006/7102 under the Anti Money dated 25/01/2006 and no.NSE/INVG/2006/33 dated 24/03/2006
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4 NSE COMPLIANCE HANDBOOK

NATIONAL STOCK EXCHANGE OF INDIA LIMITED INSPECTION DEPARTMENT CIRCULAR Download Ref. No: NSE/INSP/11532 Circular No. NSE/INSP/2008/73 To All Members Sub : Compliance Hand book With a view to facilitate easy reference on various compliance issues, Exchange is releasing handbook on compliance. We hope the same will serve as a guiding document and help in enhancing compliance level in your organisation. Any suggestions on improvement on the handbook are welcome. For any clarifications, trading members may contact any of the following officials: Mr. Hansen Cardoza, Mr. Parameshwaran or Ms. Sania Surve Direct No.: 2659 8196 Board Lines: 2659 8100 8114 Extn. 5123 / 5124 / 5128 For National Stock Exchange of India Limited
Dated: 23rd October 2008
A. Sebastin Asst. Vice-President Inspection Department
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COMPLIANCE HANDBOOK
Preamble Compliance requirements pertaining to members of the Exchange are given in byelaws, regulations and circulars of the Exchange and the Clearing Corporation. In order to facilitate quick reference to such requirements, an attempt has been made to collate them in a single handbook. This compliance handbook is presented as a guiding document for carrying out internal compliance checks by members in their head office, branch offices and offices of sub broker(s)/authorized person(s). Table of contents No. I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII. XVIII. XIX. XX. XXI. Contents Client Registration Order Management System and Internal Controls Contract note Electronic Contract note (ECN) Charging of Brokerage Quarterly statement of accounts Banking and demat account operations Dealing with clients funds and securities Margin Requirements Internet Trading Other dealings with clients Dealing with intermediaries Location and Operation of Terminals Display of Notice Board / SEBI registration certificate Control over branches and sub brokers Issue of advertisement Maintenance of Records Continued membership requirements Due diligence in employee activities Compliance with Prevention of Money Laundering Act (PMLA), 2002 Compliance calendar
I.Client Registration Client registration documents are to be executed with any new client before commencing transactions with the client Client registration documents are to be segregated into mandatory and nonmandatory parts. Know your client (KYC) form, Member constituent agreement (MCA) and Risk Disclosure document (RDD) as per the SEBI prescribed formats, constitute the mandatory part of the registration documents. All additional and voluntary clauses should be taken in voluntary documents separated from the mandatory part. In KYC ensure that - complete details of Client information / Status, Bank and Depository Account details, Financial details of the constituent, Investment/ Trading experience, References, Financial documents (for Non Individual Constituents) and Signature of client are provided - Photograph, Proof of identity and address, Board Resolution from corporate clients permitting trading in derivative products are attached.
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The segments in which a client wants to transact are selected and marked by the client clearly In MCA ensure that - In respect of clients registered in other exchange(s) also (if a member is attached to different exchanges), separate exchange-wise agreement is executed - agreement is printed on a non-judicial stamp paper of appropriate value and is dated - agreement is signed by both the member and the client and is witnessed - agreement contains clauses prescribed by SEBI / NSE from time to time - in respect of clients introduced by sub-broker, tripartite agreement is to be executed In RDD ensure that - Client acknowledges the risk disclosure document and is aware that certain basic risks are involved in trading in equity and derivative products. - Client should be made aware that contracts cannot be rescinded on the ground of lack of awareness or any other ground Conduct in person verification of individual and HUF clients Collect PAN card copy of client, verify the same with the web site of Income tax Department and upload details of the client before placing orders for the client Allot a unique client code to each client and maintain a file mapping the client codes and the PANs. Provide copies of all the executed documents to the clients Periodically update the clients financial and other details. II. Order Management System and Internal Controls Procedures to be put in place for receipt of orders, recording the same and placing the orders in the trading system of the Exchange Client-wise and security-wise limits on exposure, open position, etc. to be set up Risk mitigation measures to be documented and made accessible to clients Documentation of internal controls on areas like order modification / cancellation, client code changes and post-trade activities Ensure monitoring mechanism for clients debits / obligations and appropriate collection procedures III. Contract note Trading Member has to ensure that contract notes are issued in the prescribed format within 24 hours of execution of trades on the Exchange. To be issued on pre-printed stationary and signed by an Authorised Signatory mentioning name. Unique Client Code and PAN of the Constituent to be printed. With running serial number (reset to one at the beginning of the Financial Year) Dealing office details and PAN of the Trading Member to be printed Trade price and brokerage to be mentioned separately For contract notes issued with weighted average price for multiple trades resulting from single order, annexure containing details of all the trades to be provided Copies of contract notes and proof of Delivery / Despatch to be maintained
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IV. Electronic Contract note (ECN) ECNs can be issued only if specifically consented by client ECNs to be digitally signed, encrypted, non-tamperable and in compliance with provisions of IT Act, 2000. Delivery of ECNs to be made by sending e-mail to the mail id provided by client Log reports for sent mails and rejected / bounced mails to be maintained Client to consent that non-receipt of bounced back mail by trading member amounts to delivery of contract notes ECNs are required to be simultaneously published on the web-site of trading member and clients are given secured access to the same by way of client specific logon and password. In case of non-delivery of ECNs, contract note should be sent in physical form. V. Charging of Brokerage Brokerage rate is subject to a maximum of 2.5% of the transaction amount. However, in Capital Market segment, trading member can charge brokerage up to 25 paise per share if the market value of the scrip is less than Rs 10/-. In case of option contract, brokerage is to be charged on option premium amount and shall not exceed 2.5% of premium amount or Rs. 100/- per lot whichever is higher VI. Quarterly statement of accounts Send statement of accounts for funds and securities to all the clients in such periodicity not exceeding three months (calendar quarter) within a month of the expiry of the said period. The statements should have an account of all receipts and deliveries / payments during the relevant period and not simply, the details of holdings as at the end of the period Maintain proof of dispatch / delivery for the same. An error reporting clause giving 30 days time is to be incorporated VII. Banking and demat account operations Maintenance of separate client bank account and constituent beneficiary account for keeping clients funds and securities respectively Segregate own and clients funds / securities in separate accounts Funds / securities of clients not to be deposited in own accounts No payments towards expenses / levies can be made from client bank account Receipts from / transfer to third parties, of funds and securities should not be effected in client bank account and constituent beneficiary account VIII. Dealing with clients funds and securities Ensure that funds / securities are received from respective clients accounts only Ensure that pay-out of funds / securities is made to respective clients within one working day of pay-out by Exchange Clients funds / securities are not used for any purpose other than meeting the respective clients margin / pay in obligations Authorisation should be obtained from clients for deposit of their collaterals with exchange / clearing corporation towards margin
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Clients securities should not be pledged to bank / financier for raising funds Funds are received from / paid to clients by way of crossed cheques / demand drafts or by way of direct credit into the bank account through EFT or any other modes allowed by RBI only Ensure that no cash dealings are made with clients IX. Margin Requirements Ensure to collect initial margin and maintenance margin in the approved mode (funds / bank fixed deposits / bank guarantee / approved securities with appropriate hair cut) from the clients. Ensure to put in place risk management system regarding the amount of margin collection and the mode of collection from other clients in Capital Market segment Ensure to collect initial margin in the approved mode from clients in F & O segment on an upfront basis Trading member is required to report margin actually collected from clients, to NSCCL on a daily basis. In the computation of margin collection from the clients for the purpose of reporting to the Exchange, Unencumbered funds received only from the respective clients on an upfront basis can be included. Any Debit balances in the F&O client ledger should first be set off by apportioning the free balances / value of securities and the only balance amount if any should be considered towards margins collected from clients. Any free balance of the same clients in other segments after considering the debit balances and margins (if any) applicable in the respective segments can be considered towards margins for the F&O segment. Margins taken in the form of securities in the approved list should be valued as per the closing rate on the previous trading day and not the trading day, with an appropriate hair-cut.
Information related to margin applicable, utilised and required / balance in respect of each client is to be sent on a daily basis to the respective clients in both the segments. This information should show break up details in terms of funds, bank guarantee, bank deposits and securities. X. Internet Trading Ensure reliability, security and confidentiality of internet trading system Client specific user id and password to be used for execution of trades by the respective client Password policy to be adhered (secrecy, periodic change and other aspects) Internet clients shall trade through internet trading system and only in case of connectivity problems, their orders can be entered through back up system (like call and trade facility) after proper identification of the client Ensure that clients do not deal on behalf of others Trading Members providing internet based trading facility are required to submit SSL certificate, for year ending June every year.
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XI. Other dealings with clients Issue contract notes for all trades in respect of the constituents introduced by sub-brokers also Have direct dealings with clients introduced by a sub-broker and ensure that the sub-broker does not issue any bills / notes to the clients nor deal with the clients funds and securities in any manner Reconcile dividend account periodically and ensure that dividend received on behalf of clients is credited to the respective clients within 30 days of receipt Inform all the constituents if you are engaged in own trading. Provide exclusive e-mail id for registering investor complaints and display the id on your website and other materials, pamphlets and advertisement campaigns Maintain confidentiality of all client related information Statement of Securities Transaction tax to be issued on an annual (financial year) basis within one month from the close of the financial year, unless required by the clients otherwise as to receive the STT statement on a daily basis. XII. Dealing with intermediaries Deal directly with clients, registered sub broker in CM segment and authorised person in F&O segment Inspect at least 10% of branches and sub-brokers every year and ensure that each branches and sub-broker are inspected at least once in every five years. Ensure that you do not act through or on behalf of another trading member / sub-broker of the Exchange either for proprietary trading or for trading on behalf of clients without prior approval of the Exchange. Ensure that you deal with only one broker of another stock exchange for own transactions with prior intimation to the Exchange Ensure that dealings on behalf of constituents, through a broker of another stock exchange are done only after necessary registration as a sub-broker. In F&O segment, dealings with approved authorized persons may be done only if they are also registered as sub brokers in the Capital Market segment of the Exchange XIII. Location and Operation of Terminals Ensure that trading terminals are not located at any place other than the main / branch office and the offices of registered sub brokers / authorised persons of the member. Ensure that trading terminal is not operated by a person other than an approved user / approved person Ensure that all terminal operators in F & O segment are NCFM / BDCE qualified and that at least one of every 5 Capital Market terminal operators in a location is NCFM qualified Ensure that no NEAT terminals are extended to another location without the approval of the Exchange Upload details of all CTCL terminals to the Exchange prior to their activation. Any change in the details viz. terminal id, user, location, etc. also needs to be uploaded prior to such change. Ensure that secrecy of terminal-wise logon and password is maintained Trading Members are required to undertake system audit on annual basis, for period ending 30th June, of all the branches where CTCL or Internet Based
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Trading facility is provided and submit one consolidated report thereof to the Exchange within one month from end of the period Ensure to place orders on own account using PRO code only and through trading terminals authorised for such purpose XIV. Display of Notice Board / SEBI registration certificate Trading Members shall display, in all their offices / offices of their registered sub brokers where trading terminals are located, notice boards/plates at prominently visible locations, painted / printed in a permanent manner, in a font and colour which enables easy reading of the subject matter and containing prescribed details. Display copy of SEBI registration certificate in the above said offices. XV. Control over branches and sub brokers Ensure due diligence and credentials of entities proposed to be appointed as sub brokers/authorized persons. Ensure proper procedures while opening and closing branches Ensure that clients are informed in advance in case of closure of branch Ensure that branches, sub-brokers, authorised persons do not indulge in unauthorised trading activities. Monitor the activities of sub brokers/relationship managers/officials in-charge of branches to avoid unregistered intermediation, fraudulent activities, misuse of clients accounts, etc. Ensure proper procedure for accounting of demand drafts and pay orders received from clients in the respective clients accounts. Obtain and analyse periodic reports and information from all branches/sub brokers, to address various risk areas. Take feedback from the clients of sub brokers and branches on their dealings with the sub brokers and branch officials Inspect at least 10% of branches and sub brokers every year and ensure that each branch and sub broker is inspected at least once in every five years. XVI. Issue of advertisement Before releasing any advertisement for business promotion, a copy of the advertisement has to be submitted to the Exchange at least seven days in advance and written permission of the Exchange is to be obtained before the advertisement is published Ensure to abide by the code of advertisement given by the Exchange XVII. Maintenance of Records Maintain separate books of accounts and records for trades executed on each recognised stock exchange (in case of membership in different exchanges) Maintain records and registers relating to business for a period of five years either in hard form or non tamperable soft form, including the following Statements of funds and securities obligations received from NSCCL Client ledger, Margin register, Register of complaints Records in respect of brokerage collected separately from constituents Register of transactions Register or Ledger Account of Securities, client wise and security wise
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XVIII. Continued membership requirements Trading Member should obtain prior permission of Exchange and SEBI before effecting any change in shareholding / sharing pattern or change in directors / partners. Any change in name of the trading member must be intimated to the Exchange forthwith along with the necessary records, for the purpose of effecting the change in the SEBI registration certificate Net worth of a trading member shall always be maintained above the prescribed minimum of Rs 1 crore in case of corporates and Rs 75 lakhs in case of non-corporates. Details of Compliance Officer and any changes thereof to be intimated to the Exchange XIX. Due diligence in employee activities Trading Member shall establish and enforce procedures to supervise its business and the activities of its employees that are reasonably designed to achieve compliance with all the relevant regulatory requirements. Trading Member shall specifically authorise in writing persons, who may be authorised to transact on behalf of the member and do such acts which the member delegates to such persons XX. Compliance with Prevention of Money Laundering Act (PMLA), 2002 Appointment of and change in Principal Officer to be intimated to the Financial Intelligence Unit, India (FIU) Written procedure for compliance with PMLA to be adopted. Adopt customer acceptance policies and procedures sensitive to the risk of money laundering or terrorist financing transactions Strictly adhere to customer due diligence requirements from establishment of new account to transaction monitoring and report suspicious transactions, if any, to the FIU Organise suitable training programmes for employees and ensure awareness XXI. Compliance Calendar A consolidated checklist of reports / statements / certificates / data / submissions to be made by members to the Exchange / NSCCL is available in our consolidated circular no. NSE/INSP/2008/72 dated 18th September 2008. It is also available in our website www.nseindia.com >members>compliance for members>compliance calendar. Disclaimer:This Compliance hand book contains an illustrative but not an exhaustive list of compliance requirements which members are required to adhere to. While every effort has been made to include all the relevant compliance requirements, for the sake of complete information, members may refer to the relevant Rules, Byelaws, Regulations or Circulars in addition to this hand book.
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5 SEBI CIRCULARS
DEPUTY GENERAL MANAGER MARKET INTERMEDIARIES REGULATION & SUPERVISION DEPARTMENT DIVISION OF POLICY AND SUPERVISION - III Tel: 26449261, Fax: 26449021 Email: manojk@sebi.gov.in MIRSD/ DPSIII/ Cir-26/ 08 August 22, 2008 The Managing Director / Executive Director of all Stock Exchanges Dear Sir, Sub: Internal Audit for stock brokers/clearing members In continuation with the Circular No.F.1/5/SE/83 dated May 31, 1984 of Government of India, Ministry of Finance, Department of Economics Affairs, Stock Exchange Division, you are advised to direct your stock brokers/clearing members to carry out complete internal audit on a half yearly basis by independent qualified Chartered Accountants. The scope of such audit shall cover, interalia, the existence, scope and efficiency of the internal control system, compliance with the provisions of the SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992, circulars issued by SEBI, agreements, KYC requirements, Bye Laws of the Exchanges, data security and insurance in respect of the operations of stock brokers/clearing members. The first such audit period should be from October 1, 2008 to March 31, 2009. The exchanges shall ensure compliance of the above mandatory requirements by all the stock brokers/clearing members. The Stock Exchanges are advised to: 1. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision immediately, 2. bring the provisions of this circular to the notice of the member brokers/clearing members of the Exchange and also to disseminate the same on the website, and 3. communicate to SEBI, the status of the implementation of the provisions of this circular in the Monthly Development Report. This circular is being issued in exercise of the powers conferred by Section 11 (1) of Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market. Yours faithfully, MANOJ KUMAR
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DEPUTY GENERAL MANAGER MARKET REGULATION DEPARTMENT DIVISION OF MARKET SUPERVISION Tel : 26449261, Fax : 26449021 Email : manojk@sebi.gov.in MRD/DMS/Cir-29/2008 October 21, 2008 The Managing Director / Executive Director of all Stock Exchanges Dear Sir, Sub: Internal Audit for stock brokers/trading members/clearing members In partial modification of SEBI circular No. MIRSD/ DPSIII/ Cir-26/ 08 dated August 22, 2008 on the above subject, it has now been decided that stock brokers/trading members/clearing members shall carry out complete internal audit on a half yearly basis by chartered accountants, company secretaries or cost and management accountants who are in practice and who do not have any conflict of interest. The Stock Exchanges are advised to: 1. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above decision immediately, 2. bring the provisions of this circular to the notice of the member brokers /clearing members of the Exchange and also to disseminate the same on the website, and 3. communicate to SEBI, the status of the implementation of the provisions of this circular in the Monthly Development Report It may be noted that the other provisions of the said circular remain unchanged. This circular is being issued in exercise of the powers conferred by Section 11 (1) of Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of, and to regulate, the securities market. Yours faithfully,
MANOJ KUMAR
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6 BSE CIRCULAR
Notice no : Notice date : Subject : Segment Name : 20090325-22 Wednesday, March 25, 2009 Internal Audit of stock brokers/ trading members/clearing members General
To, The Members This is further to Exchange Notice no. 20080825-2 dated August 25, 2008 and Notice no. 20081022-30 dated October 22, 2008 wherein all the stock brokers/trading members/clearing members were directed to carry out complete internal audit on a half yearly basis by chartered accountants, company secretaries or cost and management accountants who are in practice and who do not have any conflict of interest. It was also informed that, the first internal audit period would be from October 1, 2008 to March 31, 2009. Further, on the basis of SEBI letter no. MIRSD/DPS-I/PG/158174/09 dated March 23, 2009, the applicability, scope/guidelines of audit, format of audit report, audit certificate and the time limit for submission of audit report are finalised and given as Annexure 1, 2 and 3. All stock brokers/trading members/clearing members are advised to ensure compliance with the above requirements. Members are advised to submit the Audit Reports to Dept. of Surveillance & Supervision (Inspection Cell) on 24th floor of the Exchange. In case of any queries / clarification, the members may contact the under mentioned officials on Tel:022-22721233/34
Name of the Officials Ms. Neha Malviya Ms. Anita Gorhe Ms. Parul Kothari Mr. Mitesh Thakkar
Intercom No. 8898 8095 8196 8880
P. K. Ramesh General Manager Surveillance & Supervision

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Yogesh Bambardekar Asst. Gen. Manager Surveillance & Supervision
Annexure - 1
INTERNAL AUDIT FOR STOCK BROKERS/TRADING MEMBERS/ CLEARING MEMBERS

Applicability Trading Members (Stock Brokers) and Clearing members are required to appoint an internal auditor for carrying out complete internal audit in all segments of the Exchange in which they are enabled for trading/clearing (wherein atleast a one/single trade have been executed or cleared by them) and submit a report to the Exchange on half yearly basis. The first half year period would start from October 01, 2008. Who can conduct internal audit Internal audit is required to be carried out by any Chartered Accountant, Company Secretary or Cost and Management Accountant who is in practice and who does not have any conflict of interest. . Scope/Purpose of Audit The purpose of audit should be (a) to ensure that the books of account, records and documents have been maintained in the manner required under Securities Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, SEBI (Stock brokers and Sub-brokers) Regulations, 1992, Securities Contracts (Regulation) Rules, 1957, circulars issued by SEBI & Exchange, Bye laws of the Exchange including agreements, data security and insurance in respect of operations of trading member/clearing member. (b) to ascertain whether adequate internal control systems, procedures and safeguards have been established and are being followed by the intermediary to fulfill its obligations under Securities and Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, SEBI (Stock brokers and Subbrokers) Regulations, 1992, Securities Contracts (Regulation) Rules, 1957, circulars issued by SEBI & Exchange, Bye laws of the Exchanges and with respect to data security and insurance in respect of operations of trading member/clearing member. (c) to ascertain whether any circumstances exist which would render the intermediary unfit or ineligible for dealing in securities market. (d) to ascertain whether the provisions of the securities laws and the directions and/or circulars issued there under by SEBI/Exchange have been complied with (e) to ascertain, whether the provision of Bye-laws, notices, circulars, instructions or orders issued by stock exchanges have been complied with (f) to inquire suo motu into such matters as may be deemed fit by the auditor in the interest of investors or the securities market Submission of internal audit report Internal auditor would submit the audit report to the Proprietor/ Partners/ Board of respective trading/clearing member who would place the report before its Board of Directors/proprietor/partners and shall forward the same along with para-wise/point wise comments to respective stock exchanges within 3 months from the end of the relevant half year audit period. The audit report may be combined across segments and activity (trading/clearing) for respective Exchanges.
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Non-compliance relating to internal audit by the members Non-submission of internal audit report as per the aforesaid guidelines shall be treated as non-compliance and suitable disciplinary action may be initiated against the concerned member/s. Where, in the opinion of the Exchange, the quality of the reporting is not satisfactory or the audit is not carried out in accordance with the aforesaid guidelines, the Exchange reserves the right to advise the concerned member/s to change the auditors and/or submit revised reports. Annexure - 2 Areas to be covered in internal audit and areas on which comments needs to be incorporated in the report are given below 1. Client registration and documentation Execution of KYC, MCA/TPA, and RDD checks and balances in place Verification of formats of KYC, MCA/TPA and RDD and attachments including proof of identity and address, as prescribed by SEBI/BSE Verification that Contradictory clauses are not mentioned in KYC, MCA/TPA and RDD Systems and procedures put in place by member for verification of PAN before opening account Procedure followed by the member for informing UCC to the clients & uploading to the Exchange Mechanism to ensure financial details of clients Procedure adopted for in person verification of clients Procedure adopted by relationship managers, if any, for procuring new clients Delivery of copies of client registration documents to the clients Storage of client registration documents and retrieval mechanism Procedure adopted for obtaining clients consent for electronic contract notes Periodic review of client related information and updation of the same in system Verification of RDD/KYC/MCA/TPA of different types of clients Acquaintance procedure for new clients
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Whether KYC, MCA/TPA, RDD are executed in the prescribed formats & the same is executed before execution of trades for the client? Whether UCC is allotted to the client & the same is uploaded to the Exchange with PAN Whether all fields in KYC including clients financial details are filled in properly? Whether proper proof of identity, PAN and proof of address are taken with KYC form? Whether any contravening clauses are included in MCA/TPA? Whether in person verification of clients is done by the employees of the trading member only? Whether date of verification, name and signature of the official who has done in-person verification and the members stamp incorporated in the client registration form? Whether copies of all the documents executed by client are given to the respective clients? Whether change in address, bank
account or demat account is carried out on receipt of written request along with documentary proof from the respective client? Whether client details including financial details are reviewed periodically and updated? SEBI circular no. SMDRP/Policy/Cir-39/2001 dated July 18, 2001 SEBI circular no. SEBI/MIRSD/DPS-1/Cir-31/2004, dated August 26, 2004 & Regulation-7 D SEBI circular no. MRD/DoP/SE/Cir- 35/2004 dated October 26, 2004 SEBI circular no. MRD/DoP/Cir- 05/2007 dated April 27, 2007 MIRSD/DPS-III / 130466 / 2008 dated July 02, 2008 Exchange Notice No.20040827-11 dated August 27, 2004 Exchange Notice No. 20060704-6 dated July 04, 2006 Exchange Notice No. 20080624-8 dated June 24, 2008 Exchange Notice no.20080707-3 dated July 07, 2008 Exchange Notice no.20080801-2 dated August 01, 2008 2. Order management and risk management systems Procedure adopted for receipt of orders from clients Mechanism for order management and execution Procedure adopted for setting Limits at client level / Terminal level/Dealer level Policy on Margin collection mechanism and the modes of margin money Procedure adopted for reporting of client margin collection to Clearing House Whether checks are in place to ensure that no unauthorized orders are executed from any of the terminals? Whether control reports like orders executed away from market price, client-wise / scrip-wise / terminalwise volumes / exposures are generated to monitor any manipulation or unwarranted activity? In case of dormant accounts, are there any checks in place to ensure that in case the account is reactivated whether it is operated by the respective client only? Whether initial and other margins are collected from respective clients in the prescribed form of funds, fixed deposit receipts, bank guarantees and approved securities with appropriate haircut?
Review of process adopted for monitoring / recovery of long outstanding debit balances Procedure adopted for calculation & reporting client funding Procedure for monitoring institutional trades not routed through custodians Procedure adopted for providing Direct
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Market Access (DMA) facility
Whether the member has a proper system for reporting the correct client margin collection, in Derivatives segment? Verify whether the margin reported by the member to the Exchange in Derivatives segment is actually collected and available in the books of accounts of the member. In case of any irregularity observed, mention the instances wherein wrong reporting of margin collected from clients/trading members was observed. Whether Risk Management System (RMS) includes policy on margin collection from clients/trading member and the RMS is documented? Whether proper systems are in place to ensure timely collection for pay-in from the respective client as per settlement schedule? Whether proper monitoring mechanism is in place to review long outstanding debit balances in clients accounts and recovery of the same? Whether member has reported details of client funding, if any, to the exchange within prescribed time limit? What are the sources of funds in case client funding is observed? Whether all the institutional trades are routed through custodians by following Straight Through Processing (STP) ? What are the reasons for institutional trades not being routed through custodians? Whether any specific pattern is observed for the same? Whether member has obtained prior approval from the exchange before providing terminal to the clients under DMA facility? Whether member has complied with regulatory requirements related to. DMA?
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SEBI circular no. MRD/DoP/SE/Cir-07/2005 dated February 23, 2005 SEBI circular no. MRD/DoP/SE/Cir- 17/2005 dated September 02, 2005 Exchange Notice no. 20040420-12 dated April 20, 2004. Exchange notice no. 20080417-24 dated April 17, 2008. Exchange Notice No. 20051216-8 dated December 16, 2005
3. Contract notes, Client margin details and Statement of accounts Procedure adopted for issuance of contract notes Verification of format of contract notes issued Verification of copy of contract note with Proof of dispatch/register of dispatch/logs maintained Adherence to electronic contract note norms, if applicable Procedure adopted for sending statement of accounts Contents & periodicity of statement of accounts of funds and securities Procedure adopted for sending margin details to clients Procedure for maintaining acknowledgement / proof of delivery of contract notes/statement of accounts/margin details to the clients
Whether contract notes are sent within 24 hours of execution of trades and margin details are sent daily to respective clients and proof of delivery / dispatch is maintained? Whether all prescribed details including name and signature of authorised signatory, dealing office details and brokerage are contained in contract note? In case contract notes and margin details are sent in electronic form, whether log is maintained? Whether trail of bounced mails is maintained and physical delivery is ensured in case of bounce mails? Whether member has complied with regulatory requirements related to. Electronic Contract Notes(ECN)? Whether complete statement of accounts for funds and securities are issued on a quarterly basis to clients, with error reporting clause? Whether proof of sending the same is maintained?
Clause B(2) of Code of conduct for Stock Brokers specified under Regulation 7 SMD-1/23341 dated November 18, 1993 SMD (B)/104/22775/93 dated October 29, 1993 SMD/MDP/CIR/043/96 dated August 5, 1996 MRD/DoP/SE/Cir-20/2005 dated September 08, 2005
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SEBI/DNPD/143542 /Cir-43/08 dated November 06, 2008 Exchange Notice No.20080527-6 dated May 27, 2008 Bye-Law 247A of the Rules, Bye-laws & Regulations of the Exchange Exchange Notice No. 20060627-18 dated June 27, 2006 Exchange Notice No. 20050909-13 dated September 09, 2005 Exchange Notice No. 20080211- 19 dated February 11, 2008
4. Dealing with clients funds and securities Verification of details of cash receipts from / payments to clients, if any, observed during the audit period are to be given (mentioning any specific branch involved). Whether cash dealings with clients are done by branches / sub brokers? Whether bankers cheque / demand draft are accompanied with written request from the respective client? Whether pay-in or pay-out is received from or delivered to respective clients only? Whether any instances were observed wherein pay-in / pay out was received from / made to account other than the respective client account? Whether systems are in place to ensure compliance in this regard by the member? Whether collaterals of clients were pledged with banks / other entities for raising funds? If yes, details of such instances observed are to be given. Whether funds raised by pledging client securities were utilised for respective client only? List of instances to be provided in case of nonutilisation of proceeds for respective client? Whether clients funds / securities are transferred to respective clients accounts within one working day of after the pay-out of the settlement? Whether any instance of misutilisation of clients funds or securities is observed? If yes, give complete details of such instances Whether bank book and register of securities are in alignment with bank statements and transaction statements
Verification of internal controls adopted by the member while accepting bankers cheque / demand draft from clients Procedure for ensuring that receipts and payment of funds/securities are from/to respective client only Periodic Reconciliation of books of accounts Verification of following books of accounts/records Register of Securities Bank Statements Depository accounts maintained by member Client ledgers Cash Book Bank Book Details of records of client securities pledged, if any. Underlying for any overdraft/loan
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account.
provided by banks and depositories? Whether dividend and other corporate benefits received on behalf of clients is paid/credited/passed on to the respective clients account ?
SEBI circular no. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003 Code of conduct for Stock Brokers specified under Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations, 1992. SEBI circular no. MRD/DoP/SE/Cir-11/2008 dated April 17, 2008 Exchange Notice No.20030903-5 dated September 03, 2003
5. Banking and Demat account operations Procedure for segregation of own and clients funds and securities (in separate accounts) Internal controls for use of client bank and client beneficiary accounts only for authorized purposes. Whether member maintains separate bank accounts for clients funds & own funds. Also, whether maintains separate beneficiary accounts for clients securities & own securities? Whether clients funds and securities are segregated from own funds and securities? Are there any instances of use of client beneficiary account or client bank account for unauthorised purposes? In case of any irregularity observed, mention the instances in detail. SEBI circular no. SMD/SED/CIR/93/23321 dated November 18, 1993. Bye-Law 247A of the Rules, Bye-laws & Regulations of the Exchange
6. Terminal operations and systems Procedure and policy adopted by member before allotment of trading terminals Verification of terminals and its users, at the audit place.
Whether terminals are provided by the member in his head office, branch office or the office of sub broker? Whether any unauthorized terminal is observed to be allotted? If yes, give complete details. Whether periodic audit of systems
Verification of certification of the approved users.

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Due diligence adopted for password security Procedure in place for audit of systems and software Periodic updating of version and back up mechanism System adopted for data storage, security and access Verification of logs from server
and software is conducted by certified systems auditor? Whether terminals are operated by approved persons/approved users with valid BCSM certification? Whether correct User name, login id, terminal location are reported to the Exchange? Whether internal controls are in place to ensure that the certification of approved users has not expired? Whether prior permission is obtained by member for providing IML? Whether member has complied with applicable provision of IML? Whether updated version of software is used? Whether back up facilities are in place and followed? Whether broker has got his system audit done & submitted the system audit report to the Exchange within prescribed time limit?
SEBI circular no. SMDRP/Policy/Cir-49/2001 dated October 22, 2001 SEBI/MRD/SE/15958/2003 August 22, 2003 Exchange Notice No.20070517-26 dated May 17, 2007
7. Management of branches / sub brokers and internal control System and Policy followed for opening / closing of branch Procedure adopted to inform the same to clients Periodicity and procedure adopted for inspection of branches / sub brokers Reporting mechanism and mode of informing the inspection observations to branches / sub brokers Follow up action plan Policy of fixing of roles and responsibilities of
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Whether survey is conducted by the member for opening / closing of branches? In case of closure, whether advance notice of the same is sent to clients? Proof of the same. Whether there is monitoring mechanism to identify sudden increase / decrease in client level turnover from any specific branch? Whether periodic inspection of branch / sub broker is conducted and reports are maintained? What is
officials in head office, branches and subbrokers office Process laid out so as to prevent unregistered intermediation Documentation of Internal controls Comments on Internal controls in place and
the follow-up mechanism? Whether unregistered intermediation is observed? Whether the member has shared commission/brokerage with entities with whom trading members are forbidden to do business / another trading member / employee in the employment of another trading member? Whether internal controls exists and are sufficient to cover the risks at the members end? Whether Stock broker indemnity policy with standard cover/clauses has been taken?
Verification of Stock broker indemnity insurance policy Sharing of commission/brokerage
Section 12 of SEBI Act SEBI circular no. SMD/SED/RCG/270/96 dated January 19, 1996 SEBI circular no. SMD/Policy/CIR-3/98 dated January 16, 1998 SEBI circular no. Sub-Brok/Cir/02/2001 dated January 15, 2001 Regulation 18B of SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 SEBI circular no. SMD/POLICY/CIRCULAR/3- 97 dated March 31, 1997. Exchange Notice No.20080612-3 dated June 12, 2008 Exchange Notice No.20080716 10 dated July 16, 2008.
8. Investor grievance handling Mechanism to monitor complaints lodged with branches/sub-brokers Maintenance of complaints register Redressal mechanism for complaints registered against the member Comment on complaints pending for long period Verification of investor grievance register and email id What is the system to report complaints received by branches / sub brokers to the head office? Whether complaints are received from specific branch/sub-broker? Whether complaints register includes complete details of investor complaints? What is the procedure adopted to resolve complaints?
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Internal control for verification of complaints received through the designated email id
Whether specific action plan is framed by the member in respect of long pending complaints? Whether designated email id for investor grievances is created and informed to the investors ? What is the periodicity of monitoring investor complaints? Whether complaints of substantial amount is escalated to the top management ?
SEBI circular no. MRD/DoP/Dep/SE/Cir-22/06 dated December 18, 2006 Clause 1(d) of Regulation 12A Exchange Notice No.20070131-11 dated January 31, 2007
9. Maintenance of Books of Accounts Prescribed books of accounts, registers and records are maintained Exchange wise, with the required details and for the stipulated period as per regulatory requirement Whether prescribed books of accounts, registers and records are maintained Exchange wise, with the required details and for the stipulated period as per regulatory requirement? Whether exchange wise separate books of accounts are maintained? Whether member has dealt with any suspended /defaulter /expelled member and/or prohibited entity? Whether prior approval has been obtained by member for change in shareholding/directors/constitution? Whether prior approval has been obtained in case the member has dealt with another member of the Exchange? Whether member has intimated the Exchange in case of they have dealt with member of another stock exchange? Whether advertisements are issued after prior permission of the Exchange? Whether member maintains and updates client master in its back office?
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Verification of books of accounts and other records
Internal controls on the process for taking approval of the Exchange Analysis of financial reports
Whether financial reports of the member has been analysed? Comments on the same. Rule 15 of Securities Contract Regulation Rules 1957 Regulation 17(1) & 18 of SEBI (Stock Broker Sub-broker) Regulation 1992 Rule 4 (c) of SEBI (Stock Brokers and Sub Brokers) Rules, 1992 Clause C(4) & C (5) of Regulation 7 SEBI Circular No. SMDRP/Policy/Cir-49/2001 dated October 22, 2001 SEBI circular no. MIRSD/MSS/Cir- 30/ 13289/03 dated July 09, 2003 SEBI circular no. SEBI/MIRSD/Cir-06/2004 dated January 13, 2004 SEBI circular no. MIRSD-DR 1/SRP/Cir- 43/28408/04 dated December 15, 2004 SEBI circular no. SEBI/MRD/SE/Cir-15/2005 dated August 4, 2005 Exchange Notice No. 20040117-8 dated January 17, 2004
10. Systems & Procedures pertaining to Prevention of Money Laundering Act (PMLA), 2002 Customer acceptance policy and customer due diligence measures What is the process adopted by member to verify the identity of the customer and/or the person on whose behalf a transaction is being conducted ? Whether any account was opened in fictitious name/benami account ? What checks and balances are in place to ensure that the identity of the client does not match with any person having criminal background or is not banned in any other manner? What are the factors of Risk perception having regard to client's location, address, nature of business activity, trading turnover and the manner of making payments so that the clients can be classified in to "High Risk", " Medium Risk"," Low Risk" category? Whether details of appointment of Principal Officer and change in Principal officer, if any is intimated to FIU-India? Whether member has adopted and implemented written guidelines prescribed under PMLA, 2002?
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Walk through of the process Process of generation and monitoring alerts System in place that allows continuous monitoring of transactions Process for identifying STR (Suspicious Transaction Report) and reporting the same to FIU-India filed
Processes for verification of alerts with KYC details
Whether member has adequate system to generate alerts for suspicious transactions? As per provisions of Prevention of Money Laundering Act, 2002 whether record of transactions, its nature and its value are maintained? SEBI circular no. ISD/CIR/RR/AML/1/06 dated January 18, 2006 SEBI circular no. ISD/CIR/RR/AML/2/06 dated March 20, 2006 SEBI circular no. ISD/AML/CIR-1/2008 dated December 19, 2008 SEBI letter no. ISD/SR/AK/AML/150847/2009 dated January 15, 2009 Exchange Notice no.20060321-15 dated March 21, 2006 Exchange Notice No.20081222-21 dated December 22, 2008 Exchange Notice No.20090122-9 dated January 22, 2009 11. Transfer of trades Transfer of trades in the back office Whether any trades were transferred from one client code to another client code or from client code to pro or vice-versa in the back office of the member? Whether any pattern was observed in case, transfer trades carried out at members back office
Verification of trade files downloaded by the Exchange with sauda register/back-office file of member (based on which contract notes are generated) Internal controls for transfer of trades
SEBI circular no. SEBI/MRD/SE/Cir- 32/2003/27/08 dated August 27, 2003 Exchange Notice No.20030329-1 dated March 29, 2003
12. Margin Trading Verification of agreements Records of funding
Whether member has obtained specific approval from the exchange, in case he is providing margin trading facility to his clients? Whether member has complied with regulatory requirements related to margin trading?
SEBI circular no. SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004 Exchange Notice No.20040402-31 dated April 02, 2004
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13. Proprietary Trading Verification of ids enabled for pro
If member is doing pro trading, whether member has disclosed this information to his clients? If member is doing pro trading from multiple locations, whether member has obtained prior approval from the Exchange in this regard?
Process for approval of Exchange
SEBI circular no. SEBI/MRD/SE/Cir-32/2003/27/08 dated August 27, 2003 SEBI letter no. SEBI/MRD/SE/Cir-42/2003 dated November 19, 2003 Exchange Notice No. 20031125-7 dated November 25, 2003 Exchange Notice No. 20030909-1 dated September 09, 2003
14. Internet Trading Process of approval from Exchange Verification of internet agreements Whether member has obtained specific approval from the exchange, in case he is providing internet trading facility to his clients? Whether member has complied with regulatory requirements related to internet trading ? Whether broker has got his system audit done & submitted the system audit report to the Exchange within prescribed time limit ?
Procedure followed for user id and password
Internal controls for internet trading
SEBI Circular no. SMDRP/POLICY/CIR-06/2000 dated January 31, 2000 Exchange Notice No. 47315 /2000 dated April 17, 2000
15. Operations of Professional Clearing member/ Members clearing trades of other trading members Verification of execution of trading -clearing member (TM-CM) agreements/Custodial Participant agreements Verification of issuance of statement of accounts to trading members/custodial participants Whether TM-CM agreements are executed in prescribed formats with trading member? Whether Clearing member custodial participant agreements are executed in prescribed formats ?
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Whether statement of accounts has been sent to trading member/custodial participants/? Whether clearing members had collected appropriate and adequate margins in prescribed forms from respective trading members? Whether Margin collection reported to Exchange is in accordance with margins actually collected from trading member ? Whether exposure allowed to trading members were based on requisite margins available with the clearing member? Whether interest is charged to the trading member? If yes, what is the basis of interest with complete details like percentage of interest, periodicity of interest charged
16. Securities Lending & Borrowing Scheme Process of approval from Exchange Whether member has obtained specific approval from the exchange? Whether member has complied with regulatory requirements related to SLBS ?
Verification of SLBS agreement
SEBI circular no. MRD/DoP/SE/Dep/Cir-14 /2007 dated the December 20, 2007 SEBI circular no. MRD/DoP/SE/Cir- 31 /2008 dated October 31, 2008 Exchange notice no. 20071224-10 dated December 24, 2007 Exchange notice no. 20080128-3 January 28, 2008 Exchange notice no. 20080130-38 dated January 30, 2008 Exchange notice no. 20080417-23 dated April 17, 2008 Exchange notice no. 20081223-15 dated December 23, 2008
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Points to be noted The guidelines prescribed hereunder do not limit the scope of the internal audit. The points mentioned are only indicative in nature and not exhaustive. This has been prepared based on the regulatory requirement (as per relevant acts, rules, regulations and circulars) which keep on developing from time to time. The auditors should peruse them and update the scope of the audit. The report shall also include the following. 1. If any major significant deviations and deviations of recurring nature are observed, the same should be reported separately in the covering page of the audit report. If auditors observations are in the nature of a deviation or a recommendation, the members response should be sought and recorded in the report. 2. Comments by auditor on the status of compliance in respect of deviations reported in the last audit report, 3. Improvements brought about in the operations between the last audit and the current audit. 4. In case the member has been inspected in the relevant half year by the Exchange / SEBI, comments by the auditor on whether the member has complied with the observations made in the Exchange/SEBI inspection report are to be included in the audit report. 5. A statement by the auditor that the provisions of SCRA 1956, SEBI Act 1992, SEBI (Stock Brokers and Sub-brokers) Regulations 1992, Rules, Bye laws, Regulations and circulars of SEBI, agreements, Bye laws of Exchange, circulars of Clearing House, data security and insurance have been covered in the audit. 6. Auditor shall specifically declare about direct / indirect interest in or relationship with the member or its share holders / directors / partners / proprietors / management, if any and also confirm that they do not perceive any conflict of interest in such relationship / interest while conducting internal audit of the said member. 7. Membership number allotted by the affiliated professional body should be quoted at the bottom of the report as provided in the format. 8. Observations in the report should be quantified giving instance wise details, details of segment and activity (trading or clearing) for which such violations are observed. Annexure - 3 CERTIFICATE FOR INTERNAL AUDIT We have examined the relevant books of accounts, records and documents maintained by M/s. _______________, (name of the trading/clearing member) bearing SEBI registration number ______________________) a member of the National Stock Exchange of India Limited / Bombay Stock Exchange Ltd. / MCX-Stock Exchange /other Stock Exchange, for the following segments to fulfill the internal audit requirement as prescribed by SEBI vide circulars dated August 22, 2008 & October 21, 2008, for the half year ended_____________________.
Segments (Cash Segment/Derivatives Segment / Debt Segment /Currency Derivatives/Securities Lending & Borrowing segment) Activity (Trading/Clearing/Trading and Clearing) SEBI registration number
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The purpose of this audit is to examine that the processes, procedures followed and the operations carried out by the Trading Member/Clearing Member are as per the applicable Acts, Rules, Regulations, Bye-laws and Circulars prescribed by SEBI and the Stock Exchange. We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of this internal audit. In our opinion proper books of accounts, records & documents, as per the regulatory requirement have been maintained by the member, so far as it appears from examination of the books. We have conducted the audit within the framework provided by SEBI/Stock Exchange for the purpose of this internal audit. To the best of our knowledge and belief and according to the information and explanations given to us, no material fraud / non-compliance /violation by the member is observed during the course of this audit. Based on the scrutiny of relevant books of accounts, records and documents, we certify that the member has complied with the relevant provisions of SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, Securities Contracts (Regulation) Rules 1957, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and various circulars of SEBI. The member has complied with the Rules, Bye-laws, Regulations of BSE / NSE / MCX-SE and various circulars issued by the Stock Exchange and Clearing Corporation/Clearing House. We declare that we do not have any direct / indirect interest in or relationship with the member or its directors / partners / proprietors / management and also confirm that we do not perceive any conflict of interest in such relationship / interest while conducting internal audit of the member. In our opinion and to the best of our information and according to the explanations given to us by the proprietor/partner(s)/director(s)/compliance officer, the Report provided by us as per the Annexure and subject to our observations, which covers the entire scope of the audit, is true and correct. __________________ Company Secretary / Cost and Management Accountant / Chartered Accountant (Seal & Signature)
(Name of the Proprietor / Partner) Membership no. / CP. No. Place:Date:-
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7 NSE CIRCULAR
NATIONAL STOCK EXCHANGE OF INDIA LIMITED INSPECTION DEPARTMENT CIRCULAR DOWNLOAD REF.NO. : NSE/INSP/12174 Circular No. NSE/INSP/2009/76 To, All Trading Members and Clearing Members Sub: Internal Audit of stock brokers / trading members / clearing members This is further to our circular NSE/INSP/2008/70 (download reference no. NSE/INSP/11172) dated August 22, 2008 and NSE/INSP/2008/74 (download reference no. NSE/INSP/11537) 23rd October, 2008 wherein all trading members / clearing members were directed to carry out complete internal audit on a half yearly basis by independent qualified Chartered Accountants or Company Secretaries or Cost and Management Accountants. It was also informed that the first internal audit period would be from October 1, 2008 to March 31, 2009. Further based on SEBIs letter no. MIRSD/DPS-I/PG/158174/09 dated March 23, 2009, the applicability, scope / guidelines of audit, format of audit report and the time limit for submission of audit report have been finalized and enclosed herewith as Annexure I, II and III. In view of the above all trading members / clearing members are required to ensure to complete internal audit on a half yearly basis by chartered accountants, company secretaries or cost and management accountants who are in practice and who do not have any conflict of interest. All members are requested to ensure compliance with the above. For any clarifications, members may contact any of the following officials: Name Mr. Hansen Cardoza Mr. Parameshwaran Ms. Sania Surve Board Lines 2659 8100 8114 Extn. : 5123 Extn. : 5124 Extn. : 5128 Direct No 26598196 Dated : 25th March 2009
For National Stock Exchange of India Ltd. C N Upadhyay Asst. Vice-President- Inspection Dept Encl: As above
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Annexure I INTERNAL AUDIT FOR STOCK BROKERS I. Applicability Trading members (Stock brokers) and Clearing members are required to appoint an internal auditor for carrying out internal audit of their operations in all segments of the Exchange in which they are enabled for trading /clearing (wherein atleast a one/single trade have been executed or cleared by them) and submit exchange wise report on half yearly basis. The first half year period would start from October 01, 2008. II. Who can conduct internal audit Internal audit is required to be carried out by any Chartered Accountant, Company Secretary or Cost and Management Accountant who is in practice and who do not have any conflict of interest. . III. Scope/Purpose of Audit The purpose of audit should be (a) to ensure that the books of account, records and documents are being maintained in the manner required under Securities Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, SEBI (Stock brokers and Sub-brokers) Regulations, 1992, Securities Contracts (Regulation) Rules, 1957, circulars issued by SEBI, agreements, Bye laws of the Exchanges, data security and insurance in respect of operations of trading member/clearing members (b) to ascertain whether adequate internal control systems, procedures and safeguards have been established and are being followed by the intermediary to fulfill its obligations under Securities and Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, SEBI (Stock brokers and Subbrokers) Regulations, 1992, Securities Contracts (Regulation) Rules, 1957, circulars issued by SEBI, agreements, Bye laws of the Exchanges, data security and insurance in respect of operations of trading member/clearing members. (c) to ascertain whether any circumstances exist which would render the intermediary unfit or ineligible for dealing in securities market. (d) to ascertain whether the provisions of the securities laws and the directions and/or circulars issued there under by SEBI/Exchanges are being complied with (e) to ascertain, whether the provision of stock exchange, Bye-laws, notices, circulars, instructions or orders issued by stock exchanges are being complied with (f) to inquire suo motu into such matters as may be deemed fit by the auditor in the interest of investors or the securities market IV. Submission of internal audit report Internal auditor would submit the audit report to the Proprietor/Partners/Board of respective trading/clearing member who would place the report before its Board of
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Directors/proprietor/partners and shall forward the same along with para-wise comments to respective stock exchange within 3 months of the end of half year period. The audit report may be combined across segments and activity (trading/clearing) for respective Exchange. V. Non-compliance relating to internal audit by the members Non-submission of internal audit report as per the aforesaid guidelines shall be treated as non-compliance and appropriate action may be initiated against the concerned members. Where, in the opinion of the Exchange, the quality of the reporting is not satisfactory or the audit is not carried out in accordance with the aforesaid guidelines, the Exchange reserves the right to advise the concerned members to change the auditors and/or submit revised reports. Annexure II Areas to be covered in internal audit and areas on which comments needs to be incorporated in the report are given below 1. Client registration and documentation Execution of Know Your Client(KYC), Member Constituent Agreement(MCA)/Tripartite Agreement(TPA) and Risk Disclosure Document (RDD) checks and balances in place Verification of formats of KYC, MCA/TPA and RDD and attachments including proof of identity and address, as prescribed by NSE/ SEBI Verification that Contradictory clauses are not mentioned in KYC, MCA,TPA and RDD Systems and procedures put in place by member for verification of PAN before opening account Procedure followed by the member for informing UCC to the clients & uploading to the Exchange Mechanism to ensure financial details of clients Procedure adopted for in person verification of clients Procedure adopted by relationship managers, if any, for procuring new clients Delivery of copies of client registration documents to the clients Storage of client registration documents and retrieval mechanism Procedure adopted for obtaining clients consent for electronic contract notes Periodic review of client related
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Whether KYC, MCA/TPA, RDD are executed in the prescribed formats and the same is executed before execution of trades for the client ? Whether UCC is allotted to the client & the same is uploaded to the Exchange with PAN? Whether all fields in KYC including clients financial details are filled in properly? Whether proper proof of identity, PAN and proof of address are taken with KYC form? Whether any contravening clauses are included in MCA/TPA? Whether in person verification of clients is done by the employees of the trading member only? Whether date of verification, name and signature of the official who has done inperson verification and the members stamp incorporated in the client registration form? Whether copies of all the documents executed by client are given to the respective clients?
information and updation of the same in system Verification of RDD/KYC/MCA/TPA of different types of clients Acquaintance procedure for new clients
Whether change in address, bank account or demat account is carried out on receipt of written request along with documentary proof from the respective client? Whether client details including financial details are reviewed periodically and updated?
Exchange regulatory references Circulars- Download no. NSE/INSP/11324 dated 18Sep-08, Download no. NSE/INVG/7236 dated 3-Mar-06 SEBI references SEBI/MIRSD/DPS-1/Cir-31/2004, dated August 26, 2004 & Regulation 7 D MIRSD/DPS III / 130466 / 2008 dated July 02, 2008 MRD/DoP/Cir- 05/2007 dated April 27, 2007 SMDRP/Policy/Cir-39/2001 dated July 18, 2001. MRD/DoP/SE/Cir- 35/2004 dated October 26, 2004
2. Order management and risk management systems Procedure adopted for receipt of orders from clients Mechanism for order management and execution Procedure adopted for setting Limits at client level / Terminal level/Dealer level Policy on Margin collection mechanism and the modes of margin money Procedure adopted for reporting of client margin collection to clearing corporation Review of process adopted for monitoring/recovery of long outstanding debit balances Procedure adopted for calculation and reporting client funding Procedure for monitoring institutional trades not routed through custodians Procedure adopted for providing Direct Market Access (DMA) facility
Whether checks are in place to ensure that no unauthorized orders are executed from any of the terminals? Whether control reports like orders executed away from market price, clientwise / scrip-wise / terminal-wise volumes / exposures are generated to monitor any manipulation or unwarranted activity? In case of dormant accounts, are there any checks in place to ensure that incase the account is reactivated whether it is operated by the respective client only? Whether initial and other margins are collected from respective clients in the prescribed form of funds, fixed deposit receipts, bank guarantees and approved securities with appropriate haircut ? Whether the member has a proper system for reporting the correct client margin collection to NSCCL, in Derivatives segment? Verify whether the margin reported by the member to the Exchange in Derivates segment is actually collected
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and available in the books of accounts of the member. In case of any irregularity observed, mention the instances wherein wrong reporting of margin collected from clients/trading members was observed. Whether Risk Management System (RMS) includes policy on margin collection from clients/trading member and the RMS is documented? Whether proper systems are in place to ensure timely collection for pay-in from the respective client as per settlement schedule? Whether proper monitoring mechanism is in place to review long outstanding debit balances in clients account and recovery of the same? Whether member has reported details of client funding, if any, to the exchange within prescribed time limit? What are the sources of funds in case client funding is observed? Whether all institutional trades are routed through custodians by following Straight Through Processing ? What are the reasons for institutional trades not being routed through custodians? Whether any specific pattern is observed for the same? Whether member has obtained prior approval from the exchange before providing terminal to the clients under DMA facility? Whether member has complied with regulatory requirements related to. DMA? Exchange's regulatory references Circulars- Download no. NSE/INVG/7236 dated 3Mar-06, Download no. NSE/MEMB/261 dated 27-May-97, Download no. NSE/INSP/11324 dated 18-Sep-08, Download no. NSE/CMPT/6610 dated 06-Sep05, NSE/CMPT/6653 dated 16-Sep-05, Download NSE/CMTR/10537 dated 3-Apr-08, Download no. NSE/CMTR/6732 dated 04-Oct-05, Download no. NSE/CMTR/6963 dated 19-Dec-05, Download no. NSE/CMPT/11276 dated 10-Sep-08
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SEBI references MRD/DoP/SE/Cir-07/2005 dated February 23, 2005 MRD/DoP/SE/Cir- 17/2005 dated September 02, 2005 3. Contract notes, Client margin details and Statement of accounts Procedure adopted for issuance of contract notes Verification of format of contract notes issued Verification of copy of contract note with Proof of dispatch/register of desptach/logs maintained Adherence to electronic contract note norms, if applicable Procedure adopted for sending statement of accounts Contents & periodicity of statement of accounts of funds and securities Procedure adopted for sending margin details to clients Procedure for maintaining acknowledgement/proof of delivery of contract notes/statement of accounts/margin details to the clients
Whether contract note are sent within 24 hours of execution of trades and margin details are sent daily to respective clients and proof of delivery / dispatch is maintained? Whether all prescribed details including name and signature of authorised signatory, dealing office details and brokerage are contained in contract note? In case contract notes and margin details are sent in electronic form, whether log is maintained? Whether trail of bounced mails is maintained and physical delivery is ensured in case of bounce mails? Whether member has complied with regulatory requirements related to. Electronic contract notes (ECN)? Whether complete statement of accounts for funds and securities are issued on a quarterly basis to clients, with error reporting clause? Whether proof of sending the same is maintained?
Exchange's regulatory references Circular Download no. NSE/INSP/11324 dated 18Sep-08 SEBI references Clause B(2) of Code of conduct for Stock Brokers specified under Regulation 7 SMD-1/23341 dated November 18, 1993 SMD (B)/104/22775/93 dated October 29, 1993 SMD/MDP/CIR/043/96 dated August 5, 1996 MRD/DoP/SE/Cir-20/2005 dated September 08, 2005 SEBI/DNPD/143542 /Cir-43/08 dated November 06, 2008
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4. Dealing with clients funds and securities Verification of details of cash receipts from / payments to clients, if any, observed during the audit period are to be given (mentioning any specific branch involved). Verification of internal controls adopted by the member while accepting bankers cheque / demand draft from clients Procedure for ensuring that receipts and payment of funds/securities are from/to respective client only Periodic Reconciliation of books of accounts Verification of following books of accounts/records - Register of Securities - Bank Statements - Depository accounts maintained by member - Client ledgers - Cash Book - Bank Book - Details of records of client securities pledged, if any. - Underlying for any overdraft/loan account.
Whether cash dealings with clients are done by branches / sub brokers? Whether bankers cheque / demand draft are accompanied with written request from the respective client? Whether pay-in or pay-out is received from or delivered to respective clients only? Whether clients funds / securities are transferred to respective clients within one working day of payout from Exchange ? Whether any instance of misutilisation of clients funds or securities is observed ? If yes, give complete details of such instances Whether any instances were observed wherein pay-in / pay out was received from / made to account other than the respective client account? Whether there are any systems in place to ensure compliance in this regard by the member? Whether collaterals of clients were pledged with banks / other entities for raising funds? If yes, details of such instances observed are to be given. Whether funds raised by pledging client securities were utilised for respective client only? List of instances to be provided in case of non-utilisation of proceeds for respective client? Whether bank book and register of securities are in alignment with bank statements and transaction statements provided by banks and depositories?
Whether dividend and other corporate benefits received on behalf of clients is paid/credited/passed on to the respective clients account ? Exchange's regulatory Circular Download no. NSE/INSP/11324 dated 18-Sep-08 and CM and F&O regulations.
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SEBI references SEBI Circular No. SEBI/MRD/SE/Cir- 33/2003/27/08 dated August 27, 2003 SMD/POLICY/Cir -06 /03 dated February 12, 2003 Code of conduct for Stock Brokers specified under Regulation 7 of SEBI (Stock Brokers and Sub brokers) Regulations, 1992. MRD/DoP/SE/Cir- 11/2008 dated April 17, 2008 5. Banking and Demat account operations Procedure for segregation of own and clients funds and securities (in separate accounts) Internal controls for use of client bank and client beneficiary accounts only for authorized purposes. Verification of clients bank account and constituent beneficiary accounts
Whether member maintains separate bank account for client funds and own funds. Also whether member maintains separate beneficiary account for clients securities and own securities? Whether clients funds and securities are segregated from own funds and securities?
Are there any instances of use of constituent beneficiary account or client bank account for other than authorized purposes ? In case of any irregularity observed, mention the instances in detail. Exchange's regulatory references Circular Download no. NSE/INSP/11324 dated 18Sep-08 and CM and F&O regulations. SEBI reference SEBI Circular No. SMD-1/23341 dated November 18, 1993. 6. Terminal operations and systems Procedure and policy adopted by member before allotment of trading terminals Verification of terminals and its users, at the audit place. Verification of certification of the approved users. Due diligence adopted for password security Procedure in place for audit of systems and software Periodic updating of version and back up mechanism System adopted for data storage, security and access Verification of logs from server
Whether terminals are provided by the member in its head office, branch office or the office of sub broker? Whether any unauthorized terminal is observed to be allotted? If yes, give complete details. Whether periodic audit of systems and software is conducted by certified system auditor? Whether terminals are operated by approved persons/approved users with valid NCFM certification? Whether correct User name, login id, terminal location are reported to the Exchange?
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Whether internal controls are in place to ensure that the certification of approved users has not expired? Whether prior permission is obtained by member for providing CTCL? Whether member has complied with applicable provision of CTCL? Whether updated version of software is used? Whether back up facilities are in place and followed? Whether broker has got his system audit done & submitted the system audit report to the Exchange within prescribed time limit? Whether sufficient security is in place? system for data
Exchange's regulatory references Download no. NSE/CMTR/6552 dated 24-Aug-05, download no. NSE/FAOP/6553 dated 24-Aug-05, download no. NSE/MEMB/3574 dated 29-Aug-02, NSE/MEMB/3635 dated 25-Sep-02, download no NSE/MEM/3740 dated 13-Nov-02 and NSE/MEM/7992 dated 10-Oct-06, download no. NSE/CMTR/7634 dated 28-Jun-06, download no. NSE/CMTR/6128 dated 10May-05, download no. NSE/CMTR/8089 dated 10-Nov06 SEBI references SMDRP/Policy/Cir-49/2001 dated October 22, 2001 SEBI/MRD/SE/15958/2003August 22, 2003
7. Management of branches / sub brokers and internal control System and Policy followed for opening / closing of branch Procedure adopted to inform the same to clients Periodicity and procedure adopted for inspection of branches / sub brokers Reporting mechanism and mode of informing the inspection observations to branches / sub brokers Follow up action plan Policy of fixing of roles and responsibilities of officials in head office, branches and sub-brokers office Process laid out so as to prevent
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Whether survey is conducted by the member for opening / closing of branches? In case of closure, whether advance notice of the same is sent to clients? Proof of the same. Whether there is monitoring mechanism to identify sudden increase / decrease in client level turnover from any specific branch? Whether periodic inspection of branch /
unregistered intermediation Documentation of Internal controls and Comments on Internal controls in place Verification of Stock broker indemnity insurance policy Sharing of commission/brokerage
sub broker is conducted and reports are maintained? What is the follow-up mechanism? Whether unregistered intermediation is observed? Whether the member has shared commission/brokerage with entities with whom trading members are forbidden to do business / another trading member / employee in the employment of another trading member? Whether internal controls exists and are sufficient to cover the risks at the members end? Whether Stock broker indemnity policy with standard cover/clauses has been taken ?
Exchange's regulatory references Circular no. NSE/INSP/11324 dated 18-Sep-08 and CM and FO Rules and Byelaws of the Exchange SEBI references Section 12 of SEBI Act SEBI Circular No. SMD/Policy/CIR-3/98 dated January 16, 1998 Circular No. Sub-Brok/Cir/02/2001 dated January 15, 2001 Regulation 18 B of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992 SMD/POLICY/CIRCULAR/3- 97 dated March 31, 1997. 8. Investor grievance handling Mechanism to monitor complaints lodged with branches/Sub brokers Maintenance of complaints register Redressal mechanism for complaints registered against the member Comment on complaints pending for long period Verification of investor grievance register and email id Internal control for verification of complaints received through the designated email id
What is the system to report complaints received by branches / sub brokers to the head office? Whether complaints are received from specific branch/sub broker? Whether complaints register includes complete details of investor complaints? What is the procedure adopted to resolve complaints? Whether specific action plan is framed by the member in respect of long pending complaints? Whether designated email id for investor grievance is created and informed to the investors ?
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What is the periodicity of monitoring investor complaints ? Whether complaints of substantial amount is escalated to the top management ? Exchange's regulatory references - Circular NSE/MEMB/8352 dated 9-Jan-07, Circular no. NSE/INSP/5387 dated 30-Aug-04 SEBI references Clause 1(d) of Regulation 12A MRD/DoP/Dep/SE/Cir-22/06 dated December 18, 2006 9. Maintenance of Books of Accounts Prescribed books of accounts, registers and records are maintained Exchange wise, with the required details and for the stipulated period as per regulatory requirement
Whether prescribed books of accounts, registers and records are maintained Exchange wise, with the required details and for the stipulated period as per regulatory requirement? Whether register of securities maintained client wise-scrip wise? is
Whether exchange wise separate books of accounts are maintained? Whether member has dealt with suspended//defaulter/expelled members and entities prohibited from accessing market ? Whether prior approval has been obtained by member for change in shareholding/directors/constitution? Whether prior approval has been obtained in case the member has dealt with another member of the Exchange? Whether member has intimated the Exchange in case of they have dealt with member of another stock exchange? Whether advertisements are issued after prior permission of the Exchange? Whether member maintains and update client master in its back office? Whether financial reports of the member has been analysed? Comments on the same.
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Verification of books of accounts and other records Ledger Scrutiny Internal controls on the process for taking approval of the Exchange Analysis of financial reports
Exchange's regulatory references download circular no. NSE/INSP/11324 dated 18Sep-08 and CM and F&O regulations. SEBI references Rule 15 of Securities Contract Regulation ( Rule )1957 Regulation 17(1) of SEBI (Stock Brokers and Sub brokers ) Regulations, 1992 SEBI/MRD/SE/Cir-15/2005 dated August 4, 2005 SEBI/MIRSD/Cir-06/2004 dated January 13, 2004 Rule 4 (c) of SEBI (Stock Brokers and Sub Brokers) Rules, 1992 MIRSD-DR 1/SRP/Cir- 43/28408 /04 dated December 15, 2004 MIRSD/MSS/Cir- 30/ 13289/03 dated July 09, 2003 Clause C(4) & C (5) of Regulation 7 Circular No. SMDRP/Policy/Cir-49/2001 dated October 22, 2001 10. Systems & Procedures pertaining to Prevention of Money Laundering Act, PMLA, 2002 Customer acceptance policy and customer What is the process adopted by member due diligence measures to verify the identity the customer and/or the person on whose behalf a Walk through of the process Process of generation and monitoring transaction is being conducted ? alerts System in place that allows continuous Whether any account was opened in fictitious name/benami account ? monitoring of transactions Process for identifying STR (Suspicious Transaction Report) and reporting the What checks and balances are in place to ensure that the identity of the client same to FIU-India does not match with any person having criminal background or is not banned in any other manner? Processes for verification of alerts with KYC details What are the factors of Risk perception having regards to client's location, address, nature of business activity, trading turnover and the manner of making payments so that the clients can be classified in to "High Risk", " Medium Risk"," Low Risk" category? Whether details of appointment of Principal Officer and change in Principal officer, if any, is intimated to FIU-India? Whether member has adopted and implemented written guidelines prescribed under PMLA, 2002 ? Whether member has adequate system to generate alerts for suspicious transactions? As per provisions of Prevention of Money Laundering Act, 2002 whether record of
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transactions, it's nature and it's value are maintained? Exchange's regulatory references Circular download no. NSE/INVG/7102 dated 25Jan-06 and NSE/INVG/7307 dated 24-Mar-06 and NSE/INVG/11798 dated 22-Dec-08 and NSE/INVG/11928 dated 22-Jan-09) SEBI references ISD/AML/CIR-1/2008 dated December 19, 2008 11. Transfer of trades Procedure and system adopted transfer of trades in the back office for Whether any trades were transferred from one client code to another client code or from client code to pro or viceversa in the back office of the member?
Verification of trade files downloaded by Whether any pattern was observed in the Exchange with sauda register/back- case transfer of trades carried out at office file of member (based on which members back office? contract notes are generated) Internal controls for transfer of trades Exchange's regulatory references CM and F&O regulations SEBI references SEBI/MRD/SE/Cir- 32/2003/27/08 dated August 27, 2003 12. Margin Trading Verification of agreements Records of funding Whether member has obtained specific approval from the exchange, in case he is providing margin trading facility to his clients?
Whether member has complied with regulatory requirements related to margin trading? Exchange's regulatory references Circular download NSE/MEM/4972 Dated 7-Apr-04 SEBI references SEBI/MRD/SE/SU/Cir-15/04 dated March 19, 2004 13. Proprietary Trading Verification of ids enabled for pro Process for approval of Exchange If member is doing pro trading, whether member has disclosed this information to his clients?
If member is doing pro trading from multiple locations, whether member has obtained prior approval from the Exchange in this regard? Exchange's regulatory references Circular NSE/CMTR/4540 Dated 6-Nov-03 and Exchange Circular NSE/CMTR/4460 Dated 3-Oct-03 SEBI references SEBI/MRD/SE/Cir- 32/2003/27/08 dated August 27, 2003 SEBI/MRD/SE/Cir- 42 /2003 dated November 19, 2003
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14. Internet Trading Process of approval from Exchange Verification of internet agreements
Procedure followed for user id and password Internal controls for internet trading
Whether member has obtained specific approval from the exchange, in case he is providing internet trading facility to his clients? Whether member has complied with regulatory requirements related to internet trading? Whether broker has got his system audit done & submitted the system audit report to the Exchange within prescribed time limit?
Exchange's regulatory references Circular download no. NSE/CMTR/1532 dated 16Mar-00 SEBI references SMDRP/POLICY/Cir-06/2000 dated January 31, 2000 15. Operations of Professional Clearing other trading members Verification of execution of trading clearing member (TM-CM) agreements/Custodial Participant agreements Verification of issuance of statement of accounts to trading members/custodial participants member/ Members clearing trades of
Whether TM-CM agreements are executed in prescribed formats with trading member? Whether Clearing member custodial participant agreements are executed in prescribed formats ? Whether statement of accounts has been sent to trading member/custodial participants/? Whether clearing members had collected appropriate and adequate margins in prescribed forms from respective trading members? Whether Margin collection reported to Exchange is in accordance with margins actually collected from trading member ? Whether exposure allowed to trading members were based on requisite margins available with the clearing member? Whether interest is charged to the trading member? If yes, what is the basis of interest with complete details like percentage of interest, periodicity of interest charged
Exchange's regulatory references - Circular no. NSE/CMPT/11276 dated 10-Sep-08

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16. Securities Lending & Borrowing Scheme Process of approval from Exchange Verification of SLBS agreement
Whether member has obtained specific approval from the exchange?
Whether member has complied with regulatory requirements related to SLBS ? Exchange's regulatory references - Circular no NSE/CMPT/10146 dated 28-Jan-08, NSE/CMPT/10593 dated 17-Apr-08 and NSE/CMPT/11757 dated 12-Dec-08, NSE/CMPT/10146 dated 30-Jan-08 SEBI references MRD/DoP/SE/Cir- 31 /2008 dated October 31, 2008 Points to be noted The guidelines prescribed hereunder do not limit the scope of the internal audit. The points mentioned are only indicative in nature and not exhaustive. It however, does not limit the scope of the internal audit. This has been prepared based on the regulatory requirement (as per relevant acts, rules, regulations and circulars) which keep on developing from time to time. The auditors should peruse them and update the scope of the audit. The report shall also include the following. 1. If any major significant deviations and deviations of recurring nature are observed, the same should be reported separately in the covering page of the audit report. If auditors observations are in the nature of a deviation or a recommendation, the members response should be sought and recorded in the report. 2. Comments by auditor on the status of compliance in respect of deviations reported in the last audit report, 3. Improvements brought about in the operations between the last audit and the current audit. 4. In case the member has been inspected in the relevant half year by the Exchange / SEBI, comments by the auditor on whether the member has complied with the observations made in Exchange / SEBI inspection report are to be included in the audit report. 5. A statement by the auditor that the provisions of SCRA 1956, SEBI Act 1992, SEBI (Stock Brokers and Sub-brokers) Regulations 1992, SCRR 1957, Rules, Bye laws, Regulations, circulars of SEBI, agreements, Bye laws of Exchange/Clearing Corporation, date security and insurance have been covered in the audit. 6. Auditor shall specifically declare about direct / indirect interest in or relationship with the member or its share holders / directors / partners / proprietors / management if any and also confirm that they do not perceive any conflict of interest in such relationship / interest while conducting internal audit of the said member. 7. Membership number allotted by the affiliated professional body should be quoted at the bottom of the report as provided in the format. 8. Observations in the report should be quantified giving instance wise details, details of segment and activity (trading or clearing) for which such violations are observed.
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Annexure III CERTIFICATE FOR INTERNAL AUDIT We have examined the relevant books of accounts, records and documents maintained by M/s. _______________, (name of the trading/clearing member) bearing SEBI registration number ______________________) a member of the National Stock Exchange of India Limited / Bombay Stock Exchange Ltd / MCX-Stock Exchange /other Stock Exchange, for the following segments to fulfill the internal audit requirement as prescribed by SEBI vide Circulars dated 22 August 2008 & 21 October 2008, for the half year ended_____________________. Segment Activity (Cash Segment/Derivatives Segment / (Trading/Clearing/Trading Debt Segment /Currency and Clearing) Derivatives/Securities Lending & Borrowing segment) SEBI registration number
The purpose of this Audit is to examine that the processes, procedures followed and the operations carried out by the Trading Member/Clearing Member are as per the applicable Acts, Rules, Regulations, Bye-laws and Circulars prescribed by SEBI and the stock exchange(s). We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of this Internal Audit. In our opinion proper books of accounts, records and documents, as per the regulatory requirement have been maintained by the member, so far as it appears from examination of the books. We have conducted the audit within the framework provided by SEBI/Stock Exchange for the purpose of this Internal Audit. To the best of our knowledge and belief and according to the information and explanations given to us, no material fraud / non-compliance /violation by the Member is observed during the course of this Audit. Based on the scrutiny of relevant books of accounts, records and documents , we certify that the Member has complied with the relevant provisions of SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, Securities Contracts (Regulation) Rules 1957, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and various circulars of SEBI. The Member has complied with the Rules, Bye laws, Regulations of NSE / BSE / MCX-SE and various circulars issued by the Stock Exchange and Clearing Corporation/Clearing House. We declare that we do not have any direct / indirect interest in or relationship with the member or its share holders / directors / partners / proprietors / management and also confirm that we do not perceive any conflict of interest in such relationship / interest while conducting internal audit of the said member. In our opinion and to the best of our information and according to the explanations given to us by the proprietor/partner (s)/director (s)/ compliance officer, the Report
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provided by us as per the Annexure and subject to our observations, which covers the entire scope of the Audit, is true and correct. __________________ Company Secretary / Cost and Management Accountant / Chartered Accountant (Seal & Signature) (Name of the Proprietor / Partner) Membership no. / CP. No. Place:Date:-
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INTERNAL AUDIT OF STOCK BROKERS

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INTERNAL AUDIT OF STOCK BROKERS

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REFERENCER ON INTERNAL AUDIT OF STOCK BROKERS 1

Circular MRD/DMS/Cir-29/2008 dated October 21, 2008

(iii) (iv) (v) (vi)

2 REGULATORY FRAMEWORK GOVERNING STOCK BROKERS

RULES AND REGULATIONS (i) (ii)

BYE LAWS, RULES AND REGULATIONS OF STOCK EXCHANGES (i)

3 COMPLIANCE CHECKLIST FOR NSE TRADING MEMBERS*

Capital Market Trade Capital Market Trade

Within 3 months from the end of half year

Within one month from the end of March & September

Capital Market Trade

NSCCLSecurities NSCCLSecurities NSCCLSecurities NSCCLSecurities NSCCLSecurities

Daily Daily Daily Daily

NSCCLSecurities NSCCLSecurities NSCCLSecurities NSCCL-Risk

WDM WDM WDM Membership Membership

Capital Market Trade

One time / need based submissions

for providing trading

One time / need based 8

Capital Market Trade

Prior Approval required Prior Approval required

Prior to commencement of trading for a client

One time / need based submissions

Prior Approval required

Regulation 6.1.5 of Regulations of the Exchange

Regulation 6.1.5 (c) of Regulations of the Exchange

Regulation 4.4.15 of Regulations of the Exchange

R egu la t ion 6.1 .4 of Regulations of the Exchange

NSE/CMPT/5868 dated February 24, 2005

Regulation 2.1.12 of Regulations of the Exchange

Exchange's circular no Client NSE/CMTR/4460 dated 03/10/ 2003 terminal trades

R eg u l a t i o n 4.1.1 of Regulations of the Exchange

Regulation 6.1.12 of Regulations of the Exchange

R eg u l a t i o n 6.1.8 of Regulations of the Exchange

Regulation 4.2.l(c) of Regulations of the Exchange

R eg u l a t i o n 4.2.2 of Regulations of the Exchange

Regulation 6.1.15 of Regulations of the Exchange

R eg u l a t i o n 4.4.3 of Regulations of the Exchange

Exchange's NSE/CM/6768 NSE/CMT/055 February 1996

circulars and dated

Regulation 4.3.2 of Regulations of the Exchange

Regulation 6.1.6.1 of Regulations of the Exchange

Regulation 6.1.6.1 of Regulations of the Exchange

Regulation 6.1.6.2 of Regulations of the Exchange

Exchange's circular NSE/INVG/2002/3690 18th October 2002

Regulation 6.1.5 of Regulations of the Exchange

Clause 12 (l) of SEBI Act, 1992

No dealings are done through any un registered intermediary

Regulation 6.1.18 of Regulations of the Exchange

NSCCL circular NSCC/F&O/C&S/97 dated February 2002

Regulation 2.1.16 of Regulations of the Exchange

Regulation 2.2.17 of Regulations of the Exchange

Regulation 2.2.18 of Regulations of the Exchange

Regulation 4.1.1 of Regulations of the Exchange

Exchange's NSE/FO/4526 October 2003

Exchange's MEM/3441 2002

circular no. dated 14th

NSE/ Compliance officer has been appointed June

Rule/ Bye Law/Regulation/ circular of the Exchange

Regulation 4.3.1 and 4.3.2 Regulations of the Exchange

Rule 5(e) of Chapter IV of Rules of the Exchange

Exchange's circular NSE/WDM/GEN/ 0 0 2 2 d a t e d November 1994