CHAPTER 4: RISK

MANAGEMENT

FIN GROCER
4.1 Risk Management
4.1.1 Risk Management Framework for Equities Segment
• A comprehensive Risk Management framework is the backbone of the Clearing
Agency/Corporation/house. A clearing corporation/house provides settlement guarantee
i.e., the settlement of securities and funds will take place even if there is a failure by a broker
to fulfill their obligation.
• In order to safeguard against such failures the clearing agency is required to carry out the
following risk management measures as specified by SEBI through its various circulars.
• In case of Capital Market segment, Trading Members should have a prudent system of risk
management to protect themselves from client default. Margins are an important element
of such a system. The risk management system should be well documented and be made
accessible to the clients and the Exchange / Clearing Corporation. However, the quantum of
margins and the form and mode of collection of margins is left to the discretion of Members.
• Risk Management framework consists of the following components:
➢Margin
➢Liquid Asset
➢Base minimum capital
➢Pre‐trade risk control
➢Risk Reduction mode
PART-2
4.1.1.1 Margin
• Margining is a process by which a clearing corporation computes the potential
loss that can occur to the open positions (both buy and sell) held by the
members. Based on the computation, the clearing agency will ensure that the
liquid assets deposited by members is sufficient to cover the potential loss.
• The clearing corporation computes and collects three kinds of margins
namely:
• Value at Risk Margin (VaR) to cover potential losses for 99% of the days.
• Mark to Market Loss Margin: Mark to market losses on outstanding
settlement obligations of the member.
• Extreme loss margin: Margins to cover the loss in situations that lie outside the
computation of the VaR margin
 VaR Margin
• The VaR Margin is a margin intended to cover the largest loss that can be
encountered on 99% of the days (99% Value at Risk). For liquid stocks, the
margin covers one‐day losses while for illiquid stocks, it covers three‐day
losses so as to allow the clearing corporation to liquidate the position over
three days.
• For liquid stocks, the VaR margins are based only on the volatility of the
stock while for other stocks, the volatility of the market index is also used in
the computation.
• Computation of the VaR margin requires the following definitions:
• Scrip sigma means the volatility of the security computed as at the end of the
previous trading day.
• The computation uses the exponentially weighted moving average method
applied to daily returns in the same manner as in the derivatives market.
• Scrip VaR means the higher of 7.5 percent or 3.5 scrip sigmas.
• Scrip VaR for broad based ETFs based on indices shall be higher of 5%
or 3 time ETF sigma.
• Index sigma means the daily volatility of the market index (Nifty 50 or
S&P BSE Sensex) computed as at the end of the previous trading day.
The computation uses the exponentially weighted moving average
method applied to daily returns.
• Index VaR means the higher of 5 percent or 3 index sigmas. The
higher of the Sensex VaR or Nifty VaR would be used for this
purpose.
For liquid stocks, the margin covers one-day losses while for illiquid stocks, it covers three-day losses so as to
allow the clearing corporation to liquidate the position over three days. This leads to a scaling factor of square
root of three for illiquid stocks.
 Collection
➢ VaR margin is collected on an upfront basis by adjusting against the total liquid
assets of the member at the time of trade.
➢ VaR margin is collected on the gross open position of the member. The gross
open position for this purpose would mean the gross of all net positions across
all the clients of a member including his proprietary position. For this purpose,
there would be no netting of positions across different settlements.
➢ The VaR margin so collected shall be released along with the pay‐in, including
early pay‐in of securities.
• The applicable VaR margin rates shall be updated at least 6 times in a day, which
may be carried out by taking the closing price of the previous day at the start of
trading and the prices at 11:00 a.m., 12:30 p.m., 2:00 p.m., 3:30 p.m and at the
end of the trading session.
PART-3
 Mark to Market Margin
• Mark to market loss is calculated by marking each transaction in
security to the closing price of the security at the end of trading.
• In case the security has not been traded on a particular day, the latest
available closing price is considered as the closing price.
• In case the net outstanding position in any security is nil, the
difference between the buy and sell values is considered as notional
loss for the purpose of calculating the mark to market margin
payable.
Mark to Market margin is collected in the following manner:

➢The clearing corporation collects mark to market margin (MTM) from the
member/broker before the start of the trading of the next day.
➢The MTM margin is collected or adjusted against the cash/cash equivalent
component of the liquid assets of the member.
➢The MTM margin is collected on the gross open position of the member.
The gross open position means gross of all net positions across all the
clients of a member including his proprietary position.
➢There would be no netting off of the positions and setoff against mark to
market profits across two different settlements.
➢The margin so collected shall be released along with the pay‐in, including
early pay‐ in of securities.
Yes bank
PART-4
Extreme Loss Margin
• Extreme loss margin covers the expected loss in situations that go beyond those envisaged in the 99% value
at risk estimates used in the VaR margin.
➢ The Extreme Loss Margin for any stock shall be higher of:
➢ 5%, and
➢ 1.5 times the standard deviation of daily logarithmic returns of the stock price in the last six months.

➢ This computation is carried out at the end of each month by taking the price data on a rolling basis for the
past six months and the resulting value shall be applicable for the next month.
➢ The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the member on a real time
basis.
➢ The Extreme Loss Margin shall be collected on the gross open position of the member. The gross open
position for this purpose would mean the gross of all net positions across all the clients of a member
including his proprietary position.
➢ The Extreme Loss Margin so collected shall be released along with the pay‐in.
 Margins not to exceed the purchase value of a buy transaction

• In case of a buy transaction in cash

market, VaR margins, extreme loss
margins and mark to market losses
together shall not exceed the
purchase value of the transaction.
• Further, in case of a sale
transaction in cash market, the
existing practice shall continue viz.,
VaR margins and extreme loss
margins together shall not exceed
the sale value of the transaction
and mark to market losses shall
also be levied.
 For securities that have been listed for less than six months, the trading frequency and the impact cost shall be computed
using the entire trading history of the scrip.
The trading frequency and impact cost shall be calculated on the 15th of each month on a rolling basis considering the
previous 6 months for impact cost and previous 6 months for trading frequency.
On the basis of the trading frequency and impact cost so calculated, the securities shall move from one group to another
group from the first of the next month.
For the first month, till the time of monthly review, a newly listed stock shall be categorised in that Group where the market
capitalization of the newly listed stock exceeds or equals the market capitalization of 80 percent of the stocks in that
particular group.
PART-5
Calculation of mean impact cost
• The mean impact cost shall be calculated in the following manner:
• a) Impact cost shall be calculated by taking four snapshots in a day
from the order book in the past six months. These four snapshots shall
be randomly chosen from within four fixed ten‐minutes windows
spread through the day.
• b) The impact cost shall be the percentage price movement caused by
an order size of Rs.1 lakh from the average of the best bid and offer
price in the order book snapshot.
• The impact cost shall be calculated for both, the buy and the sell side
in each order book snapshot.
 Order Book
Buy Quantity Buy Price Sell Quantity Sell Price
1000 98 1000 99
2000 97 1500 100
1000 96 1000 101
Lets assume we have to buy 1500 Share

Impact cost = (Actual buy price- ideal price/ ideal price)x 100

Actual buy price = {(Quantity X Best sell price1) + (Quantity X Best sell price 2)}/Total Quantity
Actual buy price = {(1000 X 99) + (500 X 100)}/2500 = 99.333

Ideal Price = (Best Buy price + Best sell price)/2

Ideal Price = 98+99/2 =98.5

Impact cost = {(99.333-98.5)/98.5}*100 = 0.846%

Impact cost high = Liquidity less
Impact cost low = Liquidity high
Margining of Institutional Trades in Cash Market
• All Institutional trades in the cash market would be subject to payment
of margins as applicable to transactions of other investors.
• Institutional trades shall be margined on a T+1 basis with the margin
being collected from the custodian upon confirmation of trade.
• Institutional investors shall include SEBI registered category I & II FPIs and
MFs, Public Financial Institutions, Banks, Insurance companies registered
with IRDA, Pension Fund registered with PFRDA.
• The trades of FPIs shall be margined on a T+1 basis. However, the trades
of Category II FPIs who are corporate bodies, Individuals or Family offices
shall be margined on an upfront basis as per the extant margining
framework for non‐institutional trades.
PART-6
4.1.1.3 Shortfall of Margins / Pay‐in of funds
• In case of any shortfall in margin, the terminals of the broker shall be
immediately deactivated/withdrawn.
• In case of pay‐in shortfall, trading facility of the trading member shall be
withdrawn and security pay‐out would be withheld if:
➢shortfall is in excess of the base minimum capital (BMC),
➢If amount of shortage exceeds 20 percent of the BMC but less than the BMC on
six occasions within a period of three months,
• Upon recovery of the complete shortages, the member shall be permitted to
trade subject to his providing a deposit equivalent to his cumulative funds
shortage known as the 'funds shortage collateral' for a period of ten rolling
settlements which shall not be used for margin purposes.
• The Exchange may levy a penal interest of not less than 0.07 percent per day on
the pay‐in shortage of the member.
• The BMC deposit is meant to meet contingencies in any segment of
the Exchange.
➢For members who are registered on more than one segment of the
same Exchange, the highest BMC deposit across various segments is
applicable.
➢No exposure is granted against BMC deposit.
➢The Stock Exchanges shall be permitted to prescribe suitable deposit
requirements, over and above the SEBI prescribed norms, based on
their perception and evaluation of risks involved.
➢Minimum 50 percent of the deposit shall be in the form of cash and
cash equivalents.
4.1.1.5 Additional Margins
• Exchanges/clearing corporations have the right to impose additional
risk containment measures over and above the risk containment
system mandated by SEBI. However, those additional risk
containment measures should be based on objective criteria and
should not discriminate between members.
4.1.1.6 Margins from the Client
• Trading Members should have a prudent risk management system to
protect themselves against the default made by their clients. Margins
constitute an important element of risk management systems and are
required to be well documented and made accessible to the clients
and the Stock Exchanges. However, the quantum of these margins,
the form and mode of collection are left to the discretion of the
members.
4.1.1.7 Provision of early pay‐in
• Necessary systems are required to be put in place by clearing
corporations to enable early pay‐in of funds by the trading members.
• In cases where early pay‐in of funds is made by the members, the
outstanding position to that extent of early pay‐in shall not be
considered for computing the margin obligations.
• In cases where early pay‐in of securities is made prior to the
securities pay‐in, such positions for which early pay‐in (EPI) of
securities is made are exempt from margins.
4.1.1.8 Pre‐trade Risk Controls
• Pre‐trade risk control helps to prevent aberrant orders or uncontrolled trades.
• Order‐level checks
• Value/Quantity Limit per order:
➢Any order with value exceeding Rs. 10 crore per order cannot be accepted by the Stock
Exchange for execution in the normal market. The Stock Exchange(s) are also required to
ensure that appropriate checks for value and/or quantity are implemented by the stock
brokers based on the respective risk profile of their clients.
➢Cumulative limit on value of unexecuted orders of a stock broker
➢Stock Exchanges have been directed to ensure that the trading algorithms of the stock
brokers have a ‘client level cumulative open order value check’.
➢This means that the stock brokers should put‐in place a mechanism to limit the
cumulative value of all unexecuted orders placed from their terminals to below a
threshold limit set by the stock brokers.
 Dynamic Price Bands
• In 2001, SEBI had advised the Stock Exchanges to implement appropriate
individual scrip wise price bands(in either direction—upward or downward), for
all scrips in the compulsory rolling settlement. The concept of price band was not
applicable to
• (a) scrips on which derivatives products are available and
• ( b) scrips which were part of those indices on which derivatives products are
available.
• However, for scrips on which no price bands are applicable, Stock Exchanges have
implemented a mechanism of dynamic price bands. This mechanism prevents the
acceptance of orders for execution that are placed beyond the price limits set by
the Stock Exchanges.
• Stock Exchange shall set the dynamic price bands at 10 percent of
the previous closing price for the following securities:
➢Stocks on which derivatives products are available
➢Stocks included in indices on which derivatives products are available
➢Index futures
➢Stock futures
• In the event of a market trend in either direction, the dynamic price
bands shall be relaxed by the Stock Exchanges in increments of 5
percent.
Risk Reduction Mode
• Stock Exchanges shall ensure that the stock brokers are mandatorily put in risk‐reduction
mode when 90 percent of the stock broker’s collateral available for adjustment against
margins gets utilized on account of trades that fall under a margin system. Such risk
reduction mode shall include the following:
1. All unexecuted orders shall be cancelled once stock broker breaches 90 percent
collateral utilization level.
2. Only orders with Immediate or Cancel attribute shall be permitted in this mode.
3. All new orders shall be checked for sufficiency of margins.
4. Non‐margined orders shall not be accepted from the stock broker in risk reduction
mode.
5. The stock broker shall be moved back to the normal risk management mode as and
when the collateral of the stock broker is lower than 90 percent utilization level.
PART-7
4.1.2 Risk Management Framework for F&O Segment

• Risk Management framework for F&O will consist of the following:

➢Margins
➢Liquid Net worth
➢Liquid assets
4.1.2.1 Types of Margins
• Initial Margin Computation
• Initial margin is payable on all open positions of clearing members, up
to client level and shall be payable upfront by Clearing Members in
accordance with the margin computation mechanism adopted by the
Clearing Corporation.
• Initial margin shall include SPAN margins, premium margins,
assignment margin, intraday crystallised losses, delivery margins and
such other additional margins that may be specified by the clearing
Corporation from time to time. The margin calculation is carried out
using software called ‐ SPAN® (Standard Portfolio Analysis of Risk). 35
• Initial margin requirements shall be based on 99% Value at Risk (VaR)
over a time horizon as determined by Margin Period of Risk for each
product (MPOR).
• The methodology for computation of value at risk percentage shall be
as per the recommendations of SEBI from time to time.
• Initial margin for client positions shall be netted at the level of
individual client and grosses across all clients, at the trading/clearing
member level, without any set‐offs between clients.
• Initial margin requirement for proprietary positions shall be netted at
trading/clearing member level without any set‐offs between client and
proprietary positions.
• The margins computed shall be aggregated first at the trading member
level and then aggregated at the clearing member level.
• Margin Period of Risk (MPOR) for all products shall be set as 2 days. Accordingly
the initial and exposure margins shall be scaled up by the MPOR. For initial
margins, the MPOR shall be given effect by way of scaling up the Price Scan
Range used for computing the Worst Scenario Loss.
• Calendar Spread Charge: In the case of futures and options contracts on index
and individual securities, the margin on calendar spread positions shall be
calculated on the basis of delta of the portfolio consisting of futures and options
contracts in each month.
• A calendar spread position shall be granted calendar spread treatment till the
expiry of the near month contract. The calendar‐spread margin shall be charged
in addition to worst‐scenario loss of the portfolio.
• The spread charge shall be 0.5 percent per month of spread on the far month
contract subject to a minimum margin of 1 percent and a maximum margin of 3
percent on the far side of the spread with legs upto 1 year apart
• Exposure margins
• Clearing members shall be subject to exposure margins in addition to initial margins. The
applicable exposure margin on the different futures and options contracts shall be as follows:
• Index Futures contracts: The exposure margin shall be 3 percent which shall be scaled up by
the MPOR. The exposure margin shall be computed on the notional value of the gross open
positions in futures contracts, based on the last available trading price of the relevant futures
contract.
• Short Index Options contracts: The exposure margin shall be 3 percent shall be scaled up by
the MPOR. The exposure margin shall be on the notional value of the short open positions in
of the notional value of the short open positions in options on index, based on the last
available closing price of the underlying index.
• The exposure margin shall be 5% of the notional value of the short open positions in long
dated option contracts on index, based on the last available closing price of the underlying
index. For this purpose all option contracts with expiry more than 9 months shall be treated
as long dated option contracts.
• Futures contracts on individual Securities: The exposure margins shall be higher
of 5% or 1.5 standard deviation which shall be scaled up by the MPOR. The
exposure margin shall be on the notional value of gross open position in futures
contracts based on the last available trading price of the relevant futures
contract.
• Short Option contracts on individual Securities: The exposure margins shall be
higher of 5% or 1.5 standard deviation which shall be scaled up by the MPOR. The
exposure margin shall be on the notional value of short open positions in options
on individual securities based on the last available closing price of the underlying
security in the normal market of Capital Market segment of the Exchange.
• Calendar Spread: In case of calendar spread positions in futures contracts,
exposure margin shall be levied on one third of the value of the open position of
the far month futures contract. A calendar spread position shall be granted
calendar spread treatment till the expiry of the near month contract.
PART-8
Short Option Minimum Charge
• Index Options: Short option minimum charge shall be equal to 5% of the notional value
of all short positions in index options. Notional value, with respect to an option contract,
shall be computed as the product of the short open position in that option contract
multiplied by the previous day's closing price of the index futures contract, or such other
price as may be specified by the Clearing Corporation from time to time.
• Options on individual securities: Short option minimum charge shall be equal to 7.5
percent of the notional value of all short positions in options on individual stocks.
• Notional value, with respect to an option contract, shall be computed as the product of
the short open position in that option contract multiplied by the previous day's closing
price of the underlying security in the normal market of Capital Market Segment of the
Exchange, or such other price as may be specified by the Clearing Corporation from time
to time.
• Minimum Percentage for Margins on Futures Contracts: The minimum margin percentage
on index futures shall be 5% or such other percentage as may be specified by the Clearing
Corporation from time to time. The minimum margin percentage on stock futures shall be
7.5% or such other percentage as may be specified by the Clearing Corporation from time
to time. Additionally, if the mean impact cost of a security exceeds 1%, the minimum
margin percentage in such underlying shall be scaled by square root of three.
• Premium Margin: Premium margin shall mean and include premium amount due to be
paid to the Clearing Corporation towards premium settlement, at the client level. Premium
margin shall be levied till the completion of pay‐in towards the premium settlement.
• Assignment Margin: Assignment Margin shall be levied on assigned positions of the
members (sellers) towards final exercise settlement obligations for option contracts on
index and individual securities which are settled in cash. Assignment margin shall be the
net exercise settlement value payable by a member towards final exercise settlement.
Assignment margin shall be levied till the completion of pay‐in towards the exercise
settlement.
• Cross margining is available across Cash and Derivatives segment and available
to all categories of market participants.
• When a Clearing Member clears for client/ entities in Cash and Derivatives
segments, he is then required to intimate client details through a Collateral
Interface for Members (CIM) to benefit from Cross margining. When different
Clearing Members clear for client/entities in Cash and Derivatives segments
they are required to enter into necessary agreements for availing cross
margining benefit.
• In order to facilitate efficient use of collateral by market participants, SEBI vide
its circular dated November 8, 2019 has decided to extend cross margining
facility to off‐setting positions in highly co‐related equity indices.
• CCs shall apply to SEBI for approval for providing of cross margining benefit on
co‐related equity indices which fulfil the eligibility criteria. The application shall
be accompanied with the data on eligibility criteria specified above.
PART-9
4.1.2.2 Liquid Net Worth and Exposure Limits of a Clearing Member

• The Liquid Net Worth is defined as the total liquid assets deposited with the
Exchange/Clearing Corporation towards initial margin and capital adequacy, LESS initial
margin applicable to the total gross open positions at any given point of time on all trades to
be cleared through the clearing member. The clearing member’s liquid net worth must
satisfy both the conditions given below on a real time basis:
• Condition 1: Liquid Net Worth shall not be less than Rs. 50 lacs at any point of time.
• Condition 2: The mark to market value of gross open positions at any point of time of all
trades cleared through the clearing member shall not exceed 33 1/3 (thirty three one by
three) times his liquid net worth. The notional value of gross open positions at any point in
time in the case of Index Futures shall not exceed 33 1/3 (thirty three one by three) times
the liquid net worth of a member. Exposure limits are in addition to the initial margin
requirements
 Liquid Assets
• At least 50 percent of the total liquid assets shall be in the form of cash equivalents viz. cash (debit
instructions/account payee crossed cheques/demand drafts/electronic funds transfer), bank guarantee, fixed
deposits, T‐bills and dated government securities.
• Liquid Assets for the purposes of initial margins as well as liquid net worth would include cash, fixed deposits,
bank guarantees, treasury bills, government securities or dematerialized securities (with prescribed haircuts)
pledged in favour of the Exchange/clearing corporation or bank guarantees as defined hereunder.
• Units of money market mutual funds and units of gilt funds may be accepted towards cash equivalent
component of the liquid assets of a clearing member. The unit shall be valued on the basis of its Net Asset
Value after applying a hair‐cut of 10 percent on the NAV and any exit load charged by the mutual fund.
• The valuation or the marking to market of such units shall be carried out on a daily basis. Clearing corporation
shall not accept Fixed Deposit Receipts (FDRs) from trading/clearing members as collateral, which are issued
by the trading/ clearing member themselves or banks who are associate of trading/clearing member.
 Bank Guarantees
• The clearing corporation/house would set an exposure limit for each bank, taking into account all
relevant factors including the following:
• The Governing Council or other equivalent body of the clearing corporation / house shall lay down
exposure limits either in rupee terms or as percentage of the trade guarantee fund that can be
exposed to a single bank directly or indirectly.
• The total exposure would include guarantees provided by the bank for itself or for others as well as
debt or equity securities of the bank which have been deposited by members as liquid assets for
margins or net worth requirement. Not more than 5 percent of the trade guarantee fund or 1
percent of the total liquid assets deposited with the clearing house, whichever is lower, shall be
exposed to any single bank which is not rated P1 (or P1+) or equivalent, by a RBI recognised credit
rating agency or by a reputed foreign credit rating agency, and not more than 50 percent of the
trade guarantee fund or 10 percent of the total liquid assets deposited with the clearing house,
whichever is lower, shall be exposed to all such banks put together. The exposure limits and any
changes thereto shall be promptly communicated to SEBI. The clearing corporation shall also
periodically disclose to SEBI its actual exposure to various banks.
 Securities
• Equity securities classified under Group I in the underlying cash market may be accepted towards liquid assets in the
derivative markets. Securities classified under Group I shall be those as defined by SEBI from time to time. The equity
securities shall be valued/marked to market on a daily basis after applying a haircut equivalent to the respective VaR of
the equity security. The list of acceptable equity securities shall be updated on the basis of trading and mean impact
cost on the 15th of each month.
• When a security is dropped from the list of acceptable equity securities, the existing deposits of that security shall
continue to be counted towards liquid assets till the end of the month. Equity securities shall be in dematerialized form.
Units of all mutual funds may also be accepted as the securities component of liquid assets. The unit shall be valued on
the basis of its Net Asset Value (NAV) after applying a haircut equivalent to the VaR of the units NAV and any exit load
charged by the mutual fund.
• The valuation or the marking to market of such units shall be carried out on a daily basis. The valuation / marking to
market of all securities, including debt securities, dated government securities and T‐bills, shall be carried out daily, with
appropriate haircuts. Debt securities shall be acceptable only if they are investment grade. Haircuts shall be at least
10% with daily mark to market. The total exposure of the clearing corporation to the debt or equity securities of any
company shall not exceed 75% of the trade guarantee fund or 15% of the total liquid assets of the clearing corporation /
house whichever is lower. Exposure for this purpose means the mark to market value of the securities less the
applicable haircuts. All securities deposited for liquid assets shall be pledged in favour of the clearing corporation.
PART-10
Providing margin related information to clients
• Stock Brokersshould send margin related information to their clients, which shall,
inter‐alia, include:
➢Client code and name, Trade day (T)
➢Margin deposit available for the client on day T (with break‐up in terms of cash, FDRs,
BGs and securities)
➢Margin adjustments (including MTM losses) for day T after adjusting MTM profit if any.
Margin status (balance with the member / due from the client) at the end of T day.
➢Margin Collection and Enforcement: For the Equity Derivatives segment, the client
margins which are required to be compulsorily collected and reported to the
Exchange/Clearing Corporation, as the case may be, by the Clearing members/ Trading
membersshall include initial margin, exposure margin/extreme loss margin, calendar
spread margin and mark to market settlements.39
• Such margin related information (Daily margin statement) should be issued
by Stock Brokers to clients on a daily basis at the end of the trade day
(T‐Day) itself or by such timelines as may be specified from time to time.
Additionally, every Stock Broker shall maintain proper records of collateral
received from clients as under:
➢ Receipt of collateral from client and acknowledgement issued to client on
receipt of collateral
➢Record of return of collateral to client
➢Credit of corporate action benefits to clients Stock Brokers should have
adequate systems and procedures in place to ensure that client collateral is
not used for any purposes other than meeting the respective client’s
margin requirements / pay‐ins. Stock Brokers should also maintain records
to ensure proper audit trail of use of client collateral.
Enhanced Supervision of Stock Brokers 40
• To strengthen the Risk Management process and to increase investor confidence in the secondary
market, SEBI constituted a committee on “Enhanced Supervision of Stock Brokers”, which included
representatives from all stake holders that gave certain recommendations/guidelines under the
aforesaid heading. These guidelines cover the following broad areas:
➢ Uniform nomenclature to be followed by stock brokers for Naming/Tagging of Bank and
Demat Accounts and the reporting of such accounts to the Stock
Exchanges/Depositories.
➢ Monitoring of Clients’ Funds lying with the Stock Broker by the Stock Exchanges,
through a sophisticated alerting and reconciliation mechanism, to detect any mis‐utilisation
of clients fund.
➢ Changes in the existing system of internal audit for stock brokers/depository
participants.
1. Monitoring of financial strength of stock brokers by stock exchanges so as to detect any signs of deteriorating
financial health of stock brokers and serve as an early warning system to take pre‐emptive and remedial
measures.
2. Imposition of uniform penal action on stock brokers/depository participants by the Stock
Exchanges/Depositories in the event of non‐compliance with specified requirements.
3. Putting in place a mechanism and ensure that stock brokers upload following data on a monthly basis for every
client onto each stock exchange system
(a) exchange wise end of day fund balance as per the client ledger, consolidated across all segments and also net
funds payable or receivable by the broker to/from the client across all exchanges;
(b) end of day securities balances ISIN wise and end of day securities balances consolidated ISIN wise;
(c) ISIN wise number of securities pledged, if any, and the funds raised from the pledging of such securities and
consolidated number of securities pledged, if any and the funds raised from the pledging of such securities.
4. Other requirements including uploading client's funds and securities balances by stock brokers to stock
exchange system and onwards transmission of the same to the clients for better transparency, clarification on
running account settlement, Providing PAN details of directors, key management personnel and dealers, to stock
exchanges and any change thereof.
Graded Surveillance Measure (GSM) and
Additional Surveillance Measure (ASM)41
• To enhance market integrity and safeguard interest of investors, SEBI has
introduced Graded Surveillance Measures (GSM) on securities which
witness an abnormal price rise not commensurate with financial health and
fundamentals like Earnings, Book value, Fixed assets, Net‐worth, P/E
multiple, etc. Similarly, ‘Additional Surveillance Measures’ (ASM) on
securities with surveillance concerns viz. Price variation, Volatility etc. have
been introduced too
• The main objective of these measures is:
1. To alert and advice investorsto be extra cautious while dealing in these
securities
2. To advice market participants to carry out necessary due diligence while
dealing in these securities.
PART-11
 4.2 Compliances and Regulatory Reporting
• SEBI and the Stock Exchanges issued directives to be followed by stock
brokers. These include directives on margin requirements, smooth
functioning of pay‐in/pay‐out, trading restrictions, base minimum
capital, etc. Other requirements include submission of audit reports
along with the annual reports to the Exchanges and payments of
turnover fees to SEBI.
• It is the duty of the stock broskers to inform the Exchanges of any
defaulting clients or defaulting sub‐brokers.
• The stock broker shall obtain SEBI’s permission to continue dealing in
securities in case there has been any change in his firm’s constitution or
status. The stock brokers shall not enter orders into the systems of the
Exchange in order to lower or raise prices or manipulate markets.
 4.2.1 Failure to maintain or furnish documents as prescribed under the
various sub‐ sections of Section 15 of SEBI Act

• Section 15A deals with penalty for failure to furnish information, return, etc. It states that a person shall be
liable to a penalty which shall not be less than 1 lakh rupees but which may extend to 1 lakh rupees for each
day during which such failure continues subject to a maximum of one crore rupees, if he fails to:
1. Furnish any document, return or report to SEBI as required by the Act or who furnishes or files false,
incorrect or incomplete information, return, report, books or other documents.
2. File any return or furnish any information, books or other documents within the time specified, as required
by the Act or who furnishes or files false, incorrect or incomplete information, return, report, books or
other documents.
3. Maintain books of accounts or records.
• Section 15C deals with penalty for failure to redress investors' grievances. It states that, if any listed company
or any person who is registered as an intermediary, after having been called upon by SEBI in writing to redress
the grievances of investors, fails to redress such grievances within the time specified by SEBI, such company or
intermediary shall be liable to a penalty which shall not be less than one lakh rupees but which may extend to
one lakh rupees for each day during which such failure continues subject to a maximum of one crore rupees.
4.2.2 Failure to enter into an agreement with clients as prescribed
under SCRA

• Section 23B of the SCRA states that,

if any person, who is required under this Act or any bye‐laws of
a recognised stock exchange made thereunder, to enter into an
agreement with his client, fails to enter into such an
agreement, he shall be liable to a penalty,
which shall not be less than one lakh rupees but which may
extend to one lakh rupees for each day during which such failure
continues subject to a maximum of one crore rupees for every such
failure.
PART-12
4.2.2 Maintenance of different types of Books as prescribed under SC(R)R
1957
• Rule 15 of the SC(R)R states that every member of a recognised stock Exchange should maintain and preserve the following books of account and
documents for a period of five years:
• (a) Register of transactions (Sauda book).
• (b) Clients' ledger.
• (c) General ledger.
• (d) Journals.
• (e) Cash book.
• (f) Bank pass‐book.
• (g) Documents register showing full particulars of shares and securities received and delivered.
• Rule 15 of the said Rules also states that every member of a recognised Stock Exchange should maintain and preserve the following documents for a
period of two years:
• (a) Members' contract books showing details of all contracts entered into by him with other members of the same Exchange or counter‐foils or duplicates
of memos of confirmation issued to such other members.
• (b) Counter‐foils or duplicates of contract notes issued to clients.
• (c) Written consent of clients in respect of contracts entered into as principals.
PART-13
4.2.4 Settlement of accounts (funds and securities) &
Statement of accounts
• It is mandatory for stock brokers to do periodical actual settlement of funds and
securities of clients, at least once in a calendar quarter (not exceeding 90 days) or
month (not exceeding 30 days), depending on the preference of the client, given
by him/her in the KYC Form.
• While settling the account, the member should simultaneously send to the client
a ‘statement of accounts’ containing an extract from the client ledger for funds
and an extract from the register of securities displaying all receipts/deliveries of
funds/securities. The statement should also explain the retention of
funds/securities and the details of the pledge, if any. For the purpose of
quarterly/monthly settlement trading member may settle across segments of the
same Exchange for a particular client.
 4.2.5 Sending account statements to clients
• Each stock broker is required to send a statement of account for both funds
and securities at least on a quarterly basis, within a month from the end of
the period, to each client. Further, SEBI, vide its letter dated November 27,
2017 has directed that all members shall issue an Annual Global Statement
to their clients46. The statement shall be issued within 30 days from the end
of the financial year and shall contain details of all transactions executed by
the client in the financial year. The stock broker is also required to send daily
margin information to all the clients. The said information shall contain
Client Code and Name, Scrip wise Details of collaterals received /returned
from/to clients, Status of Collaterals held, Breakup of Margins held by the
member viz. value of Collaterals, Bank Guarantees, Fixed Deposit Receipts
(FDRs) held and Cash balance available, Details of amount utilized towards
margins etc.
4.2.6 Risk Based Supervision of Market Intermediaries
• In order to help better regulate the marketplace and strengthen its supervision system, SEBI
has initiated a process of formalizing its risk based approach towards supervision of market
intermediaries, including stock brokers, in alignment with the global best practices. Risk Based
supervision is a process of assessment of members by the Exchanges on a half yearly basis. It is
forward looking and preventive mechanism which aims at assessing the various business areas
of the Stock broker, and the associated quality of their management and internal controls, to
identify the areas of risks and concern and directing the supervisory focus to these areas.
• Under the new model, various market entities would be divided into four groups — very low
risk, low risk, medium risk and high risk — and the quantum of supervision and number of
inspections would vary as per the risk level of each intermediary. The risk based supervisory
model is expected to facilitate a more focused regulatory supervision. The new model would
follow four distinct steps — assessing the risk posed by a market entity, assigning ‘risk and
impact rating’ to it, determine the supervisory risk rating score and then adopt a suitable
supervisory approach.
PART-14
4.3 Core Settlement Guarantee Fund
• The Clearing Corporation (CC) of the Stock Exchange should create a
fund called Core Settlement Guarantee Fund (SGF) for each segment
of the Exchange. This fund is set up to provide settlement guarantee
in the event of a clearing member failing to fulfill their settlement
commitments. The core SGF should be used to fulfill obligations of
that failing member and complete settlement without disrupting the
normal settlement process.
 4.3.1 Corpus
• While deciding on the fair quantum of the corpus of the SGF, the CC should consider the following
factors:
1. Risk management system in force
2. Current and projected volume/turnover to be cleared and settled by the CC on a guaranteed basis.
3. Track record of defaults of members (number of defaults, amount in default) A Minimum Required
Corpus (MRC) of the core SGF should be created subject to the following conditions:
4. The MRC shall be fixed for a month.
5. By 15th of every month, CC shall review and determine the MRC for next month based on the
results of daily stress tests of the preceding month.
6. CC shall also review and determine by 15th of every month the adequacy of contributions made
by various contributors and any further contributions to the Core SGF required to be made by
various contributors for the next month.
7. For every day of the preceding month, uncovered loss numbers shall be estimated by the various
stress tests for credit risk conducted by the CC for the segment and the highest of such numbers
shall be taken as worst case loss number for the day.
8. Average of all the daily worst case loss numbers determined shall be calculated.
9. The MRC for next month shall be higher of the average arrived at as above and the segment MRC
as per previous review
 4.3.2 Contribution to Core SGF
• Contributions of various contributors to Core SGF of any segment shall be as follows:
• a) Clearing Corporation Contribution: CC contribution to Core SGF shall be at least 50 percent of the MRC
which should be from its own funds. CC contribution to core SGF shall be considered as part of its net worth.
• b) Stock Exchange Contribution: Stock Exchange contribution to Core SGF shall be at least 25 percent of the
MRC
• c) Clearing Member Primary Contribution: If the CC wishes, it can seek risk based contribution from Clearing
Members (CMs) of the segment (including custodial clearing members) to the Core SGF subject to the
following conditions that:
• • total contribution from CMs shall not be more than 25% of the MRC,
• • no exposure shall be available on Core SGF contribution of any CM (exposure‐free collateral of CM available
with CC can be considered towards Core SGF contribution of CM), and
• • required contributions of individual CMs shall be pro‐rata based on the risk they bring to the system. CC shall
have the flexibility to collect CM primary contribution either upfront or staggered over a period of time. In
case of staggered contribution, the remaining balance shall be met by CC to ensure adequacy of total Core SGF
corpus at all times. Such CC contribution shall be available to CC for withdrawal as and when further
contributions from CMs are received.
• d) Any penalties levied by CC shall be credited to Core SGF corpus.
• e) Interest on cash contribution to Core SGF shall also accrue to the Core SGF
and pro‐ rata attributed to the contributors in proportion to their cash
contribution
• f) In the event of a clearing member failing to meet his obligations to the
clearing corporation, the clearing corporation may at its discretion utilise the
settlement fund to the extent in such manner as necessary. The clearing
member shall be required to immediately pay the amount so utilised and also
pay a penal charge at the rate of 0.07% per day computed on the amount
outstanding from the day on which monies are due to be paid until the day all
obligations including shortfall in deposits are fulfilled.
• CC may utilise the Core SGF in the event of a failure of member(s) to honour
settlement commitment.
PART-16
 4.3.2 Default waterfall
• In the event of a default, the utilisation of the Settlement Guarantee
Fund shall be as per the following order:
• a) Monies of defaulting member (including defaulting member's
primary contribution to Core SGF(s) and excess monies of defaulter in
other segments).
• b) Insurance, if any. c) CC resources (equal to 5% of the segment MRC).
d) Core SGF of the segment in the following order:
• I. Penalties
• II. CC contribution to the extent of at least 25% of the segment MRC
III. Remaining Core SGF: CC contribution, Stock Exchange contribution
and non‐ defaulting members’ primary contribution to Core SGF on
pro‐rata basis.
• IV. Proportion of remaining CC resources (excluding CC contribution to
core SGFs of other segments and Rs. 100 Crore) equal to ratio of
segment MRC to sum of MRCs of all segments. Rs. 100 Crore to be
excluded only when remaining CC resources (excluding CC
contribution to core SGFs of other segments) are more than Rs. 100
Crore.
• V. CC/SE contribution to Core SGFs of other segments(after meeting
obligations of those segments) and remaining CC resources to that
extent as approved by SEBI.
• VI. Capped additional contribution by non‐defaulting members of the
segment. The additional contribution by non‐defaulting members shall
be limited to a multiple of their primary contribution to the SGF.
• VII. Any remaining loss to be covered by way of pro‐rata haircut to
payouts.
4.3.3 Stress testing and back testing
• CC should effectively measure, monitor, and manage its credit
exposures to its participants and those arising from its payment,
clearing, and settlement processes by stress testing and back testing.
CC should carry out daily stress testing for credit risk using at least
the standardized stress testing methodology prescribed for each
segment by SEBI. CCs shall also develop own scenarios for a variety of
‘extreme but plausible market conditions’ (in terms of both
defaulters’ positions and possible price changes in liquidation
periods, including the risk that liquidating such positions could have
an impact on the market) and carry out stress testing using
self‐developed scenarios.