FINANCIAL MARKETS MANAGEMENT (FMM)

CHAPTER 1: Introduction to Securities Market and Trading Membership

Securities markets - savings to investment
Primary market and secondary market
Primary market - issue of securities - equity and debt
Public issue - allotment of securities to 50 investors or more
Private placement - issue of securities to a select group of persons not exceeding 49
Secondary market - trading of securities after listing on the stock exchange.
Equity, derivatives and the debt markets
Two mediums - Over-the-Counter (OTC) market and Exchange-Traded market.
Key indicators of a securities market
Stock market index - overall behavior of the equity market, created by selecting a
group of stocks that are representative of the whole market or a specified sector or
segment of the market. E.g CNX NIFTY - blue chip index of NSE.
Market capitalization - value of all listed shares, computed on a daily basis.
Market capitalization = closing price of share * Number of outstanding shares
Market capitalization ratio - market capitalization of stocks divided by GDP, measure
of stock market size.
Turnover - for a share, multiply the traded quantity with the price. Exchange turnover
- value of all the companies traded on the exchange.
Turnover ratio - total value of shares traded for a particular period divided by market
capitalization at the end of the period, measure of liquidity in the stock market.
Products and participants
Products - securities can be of three types- equities, debt securities and derivatives
Participants - the investors, the issuers and the intermediaries. Regulated by SEBI,
RBI, MCA and DEA.
Market segments of NSE
1. Wholesale Debt Market (WDM) segment. 1994. Trading platform for wide range
of debt securities
2. Capital Market (CM) segment. 1994. Equity shares and related instruments.
Fully automated screen-based trading system known as National Exchange for
Automated Trading (NEAT) system.
3. Futures & Options (F&O) segment. 2000. Trading in derivative instruments like
index futures and options, and stock futures and options
4. Currency Derivatives Segment (CDS). 2008. Currency futures and options
trading in US Dollar-Indian Rupee (USD-INR). 2010 - Euro-INR, Pound Sterling-INR
and Japanese Yen-INR.
Interest rate futures another product in this segment-2009
Reforms in Indian Securities Markets - since 1992
1. Creation of market regulator. 1992, SEBI, protecting the investors, promoting
and regulating the securities market.
2. Screen Based Trading. Old system- open outcry system. NSE introduced SBTS
- provide efficiency, liquidity and transparency.
3. Reduction of trading and settlement cycle. All exchange to follow uniform
weekly trading cycle, all scrips were moved to rolling settlement and settlement cycle
is reduced to T+2 days 2003 onwards.
4. Equity derivatives trading. Assist market participants in managing risks better
through hedging, speculation and arbitrage. 2000 - stock and index futures and
options.
5. Demutualisation. NSE - demutualised governing structure, ownership,
management and trading with three different sets of people than brokers. All
exchanges now.
6. Dematerialisation.
The old settlement system was inefficient due to (i) the time lag for settlement and
(ii) the physical movement of paper-based securities. To obviate these problems,
two depositories were established in India, NSDL and CDSL. They have been set
up to provide instantaneous electronic transfer of securities called Demat
(Dematerialised) settlement.
7. Clearing Corporation: To address the concern of credit risk of the
counter-party, NSE had set up the first clearing corporation, National Securities
Clearing Corporation Ltd. (NSCCL).
8. Investor Protection: In order to protect the interest of the investors and
promote awareness, the Central Government established the Investor Education
and Protection Fund (IEPF) in October 2001. With similar objectives, the
Exchanges and SEBI also maintain investor protection funds to take care of
investor claims.
9. Globalisation: Indian companies have been permitted to raise resources
overseas through the issue of ADRs, GDRs, etc. Further, FlIs have been
permitted to invest in all types of securities, including government securities and
tap the domestic market. The Indian stock exchanges have been permitted to set
up trading terminals abroad. The trading platform of Indian exchanges is now
accessible through the Internet from anywhere in the world.
10. Launch of India VIX. Volatility index is a measure of the market's expectation
of volatility over the near term. It measures the amount by which an underlying
Index is expected to fluctuate in the near term, based on the order book of the
underlying index options. India's first volatility index, India VIX (based on the Nifty
50 Index Option prices) was launched by NSE in April 2008.
11. Direct Market Access: In April 2008, SEBI allowed the direct market access
(DMA) facility to the institutional investors. DMA allows brokers to offer their
respective clients direct access to the Exchange trading system through the
broker's infrastructure without manual intervention by the broker.
12. Launch of Securities Lending & Borrowing Scheme: In April 2008, the
Securities Lending & borrowing mechanism was allowed. It allows market
participants to take short positions effectively with less cost.
13. Launch of Currency Futures: On August 29, 2008, NSE launched trading in
currency future contracts in the USD-INR pair for the first time in India. Trading in
other currency pairs like Euro - INR, Pound Sterling- INR and Japanese Yen was
further made available for trading in March 2010.
14. ASBA: Application Supported by Blocked Amount (ASBA) is a major primary
market reform. It enables investors to apply for IPOs / FPOs and rights issues
without making a payment. Instead, the amount is blocked in investors' own
account and only an amount proportionate to the shares allotted goes out when
allotment is finalized.
15. Launch of Interest Rate Futures: On 31st August, 2009, futures on interest
rate were launched on the National Stock Exchange.
Stock Broker
A Stock Broker is an intermediary who arranges to buy and sell securities on the
behalf of clients (the buyer and the seller). According to SEBI a stockbroker is
member of a stock exchange and requires to hold a certificate of registration
from SEBI in order to buy, sell or deal in securities.
Member of NSE
There are no entry/exit barriers to the membership of NSE. Anybody can become
a member by complying with the prescribed eligibility criteria and exit by
surrendering membership without any hidden cost. The trading members of NSE
have certain benefits, which includes:

Access to a nation-wide trading facility for equities, derivatives, debt and hybrid
instruments/ products;

Ability to provide a fair, efficient and transparent securities market to the investors;

Use of state-of-the-art electronic trading systems and technology;

Dealing with an organisation which follows strict standards for trading &
settlement at par with those available at the top international exchanges.

New Membership
The persons eligible to become trading members of Exchange are:

Individuals, Partnership firms, Limited Liability Partnerships, Institutions including

subsidiaries of banks engaged in financial services, Banks for Currency Derivatives
Segment and Body corporates.

Membership for Different Segments at NSE

(a) Wholesale Debt Market (WDM) Segment

(b) Capital Market (CM) segment

(c) Capital Market (CM) and Wholesale Debt Market (WDM) segment

(d) Capital Market (CM) and Futures & Options (F&O) segment

(e) Capital Market (CM), Futures & Options (F&O) segment and Wholesale Debt
Market (WDM) segment

(f) Currency Derivatives (CD) segment with or without the above-mentioned

segments.

(g) Clearing Membership of National Securities Clearing Corporation Ltd. (NSCCL)

as a Professional Clearing Member (PCM).
Two types of memberships are offered:

Normal - Unrestricted business expansion

Categories under normal membership

Trading Member (cash segment, F&O, CDS,Debt)

Trading Cum Self Clearing Member (cash segment, F&O, CDS, Debt)

Trading Cum Clearing Member (F&O, CDS,Debt)

Professional Clearing Member (F&O, CDS,Debt)

Alpha - For focused proprietary trading. Proprietary Trading (Prop Trading) occurs
when a bank or firm trades stocks, derivatives, etc. in its own account, using its own
money instead of using clients' money.

Categories under alpha membership

Trading Member (cash segment, F&O)

Trading Cum Self Clearing Member (cash segment, F&O,)

Trading Cum Clearing Member (F&O)

Trading members registered in F&O segment and CD segment are eligible to

trade in the interest rate futures market.

Membership can be taken for any segments individually or in combination.

Trading Member. This category of membership entitles a member to execute trades

on his ow account as well as on account of his clients but, clearing and settlement of
trades executed through the Trading Member would have to be done through a
Trading-cum Clearing Member or Professional Clearing Member of the Exchange

Trading cum self cleaning member. This category of membership entitles a

member to execute trades and to clear and settle the trades executed on his own
account as well as on account of his clients.

Trading Cum Clearing Member. This category of membership entitles a member to

execute trades on his own account as well as on account of his clients and to clear
and settle trades executed by themselves as well as by other trading members who
choose to use clearing services of the member.

Professional Clearing Member. This entitles a member to clear and settle trades
of other members of the Exchange.
Eligibility Criteria for Membership at NSE
The standards for admission of members are laid down by the Exchange in terms
of corporate structure (shareholding pattern), capital adequacy (Paid up capital),
net worth, Interest Free Security Deposit (IFSD), Collateral Security Deposit
(CSD), track record, education, experience etc. This is done to ensure quality
broking services so as to build and sustain confidence among investors in the
Exchange's operations.
Corporate Structure (Shareholding Pattern)
Securities markets are inherently volatile and risky, and hence risk containment
mechanisms are put in place by the stock exchange. One such risk containment
tool is the concept of 'Dominant Promoter/Shareholder Group' which is very
unique for applicants acquiring membership on the NSE. Dominant Promoter
norms are applicable to all trading members.
Net Worth and Other Deposit Requirements
The net worth of the member is calculated as summation of Capital and free
reserves less non allowable assets. Deposit requirements are of two types i.e.,
Interest Free Security Deposit (IFSD) and Collateral Security Deposit (CSD). IFSD
has to be in liquid cash while CSD can be in cash or non-cash form.

Application procedure.

Applicants are required to submit application form, in the prescribed format along
with other relevant documents to the Exchange. The application for new
membership is then forwarded to Membership Recommendation Committee. The
MRC conducts interviews of the applicants for trading membership. The purpose
of the interview is to acquire information about their capability & commitment to
carry on stock broking activities, financial standing and integrity.

The MRC recommends the names for admission of trading members to the
Membership Selection Committee of the Exchange. Membership Selection
Committee (MSC) after taking into consideration the recommendations of the
MRC either approves or rejects the applications.
On getting approval from MSC an admission on a provisional basis is provided to
the applicant subject to certain conditions like registration with SEBI, submission
of relevant fees/ deposits and documents. The documents of the member are
then forwarded to SEBI for registration.

After satisfying itself as to compliance with respect to all the prescribed norms,
SEBI grants a Registration Certificate in the name of the applicant.

The applicant then has to remit the prescribed membership deposits. After
obtaining SEBI Registration, the trading member has to satisfy the Exchange and
NSCCL regarding all the formalities and requirements such as payment of
fees/deposits and submission of relevant documents, for enablement. The dealers
on CM segment are required to clear the Capital Market (Dealers) Module of
NCFM; dealers on Futures & Options Segment are required to clear the
Derivatives Market (Dealers) Module or equivalent examination of NCFM and
dealers on Currency Derivatives segment are required to clear National Institute
of Securities Market (NISM) Series I- Currency Derivatives Certification
Examination. This is a pre-requisite without which user-ids are not issued.

After ensuring that all the formalities and requirements with regard to the
Exchange and NSCCL are complied, the Trading Member is enabled to trade on
the NEAT system.
Surrender of Trading Membership
Trading members can apply for surrender of their trading membership once admitted
to the Exchange. Surrender of trading membership can be permitted by the
Exchange after fulfilling certain conditions by the member such as, clearing off all the
dues to the Exchange and NSCCL, notifying all other TMs of the approval of
surrender,', issuance of a public notification in leading dailies, etc. The deposits of
the trading members would be released by the Exchange/ NSCCL after a prescribed
lock-in period.
Suspension and expulsion of Membership
The Exchange may expel or suspend, fine under censure, warn, withdraw any of the
membership rights of a trading member if it is guilty of contravention,
non-compliance, disobedience, disregard or evasion of any of the bye-laws, rules
and regulations of the Exchange or of any resolutions, orders, notices, directions or
decisions or rulings of the Exchange or the relevant authority.
Authorized Persons
Trading members of the Exchange can appoint authorised persons in the Capital
Market, Futures & Options and Currency Derivatives Segments. Authorised
Person is "Any person- individual, partnership firm, Limited Liability Partnership
(LLP) or body corporate who is appointed as such by a stock broker and who
provides access to trading platform of a stock exchange as an agent of the stock
broker."
Authorised Person can receive remuneration for his services only from the stock
broker and shall not charge any amount from the clients.

The clients introduced by the authorised person should have a direct relationship
with the trading member. This implies that the authorised person is not allowed to
have any trading relationship with the clients. The trading member should issue
the contract notes and bills directly to the client.

Sub-broker

Sub-broker is an important intermediary between stock broker and client in capital

market segment. The trading members of the Exchange may appoint sub-brokers
to act as agents of the concerned trading member for assisting the investors in
buying, selling or dealing in securities. The sub-brokers are affiliated to the trading
members and are required to be registered with SEBI. A sub-broker is allowed to
be associated with only one trading member of the Exchange. A sub-broker may
be an individual, a partnership firm or a corporate.
Unique Client Code (UCC)
SEBI has made it mandatory for all trading members/brokers to use unique client
codes for all clients. Brokers are required to collect and maintain the Permanent
Account Number (PAN) allotted by Income Tax Department for all their clients.
Brokers should verify the documents with respect to the unique code and retain a
copy of the document. They are also required to provide the PAN and UCC of
their clients to the stock exchanges/clearing corporations and these details have
to be updated before placing orders for the clients. The stock exchanges are also
required to maintain a database of client details submitted by brokers.
Margins from the Clients
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 policy of risk management addressing the margin requirements
should be well documented and be made accessible to the clients and the stock
exchanges. The margin so collected is kept separately in the client bank
account/client beneficiary account. In case of default, they are utilized for making
payment to the clearing corporation for margin and settlement with respect to that
client.

Contract Note
Contract note is a confirmation of trade(s) done on a particular day for and on
behalf of a client. A stock­ broker should issue a contract note to his clients for
trades (purchase/sale of securities). The contract note should contain name and
address (registered office address as well as dealing office address) of the TM,
the SEBI registration number of the TM, details of trade viz. order number, trade
number, order time, trade time, security name, quantity, trade price, brokerage,
settlement number and details of other levies. The TM should preserve the
duplicate copy of the contract notes issued for a minimum of five years.
Duration for Payments/Delivery of Securities to the Clients
Every TM should make payments to his clients or deliver the securities purchased
within one working day of pay-out unless the client has requested otherwise.
Brokerage
The maximum brokerage chargeable by TM in respect of trades affected in the
securities admitted to dealing on the CM segment of the Exchange is fixed at
2.5% of the contract price, exclusive of statutory levies. This maximum
brokerage is inclusive of sub-brokerage. The brokerage should be indicated
separately from the price, in the contract note.
Separate Bank Account needed for Clients and Brokers
The TM should maintain separate bank accounts for client's funds and own funds.
It is compulsory for all TMs to keep the money of the clients in a separate account
and their own money in a separate account. Funds should be transferred from the
client account to the clearing account for the purpose of funds pay-in obligations
on behalf of the clients and vice- versa in case of funds pay-out. No payment for
transaction in which the TM is taking position as a principal is allowed to be made
from the client's account.
Segregation of Demat (Beneficiary) Accounts
The trading members should keep the dematerialised securities of constituents in
a separate beneficiary account distinct from the beneficiary account maintained
for holding their own dematerialised securities. No delivery towards the own
transactions of the trading members is allowed to be made from the account
meant for constituents. For this purpose, every trading member is required to
open a beneficiary account in the name of the trading member exclusively for the
securities of the constituents (to be referred to as "constituents' beneficiary
account").
Sub-broker-Client Relationships.
A sub-broker is required to enter into a tripartite agreement with its clients and the
stock broker specifying the scope of rights and obligations of the sub-broker, the
stock broker and such client of the sub-broker as per the format prescribed by
SEBI for dealing in securities in cash segment.
Sub-broker is required to help the client in redress of grievance in respect of
transactions executed through its associated broker. Sub-broker is also required
to assist and co-operate in ensuring faster settlement of any arbitration
proceeding arising out of the transaction entered through its associated broker
and is jointly/severally liable to implement the arbitration award.
A sub-broker should provide assistance to stock broker and clients to reconcile
their accounts at the end of each quarter with reference to all the settlements
where payouts have been declared during the quarter.
A stock broker should issue contract note to client introduced through a
sub-broker. A sub-broker should render necessary assistance to its client in
obtaining the contract note from the stock broker. Sub-broker should not issue any
contract note or confirmation memo to its client.
Transactions in securities executed on behalf of a client introduced through the
sub-broker should be settled by delivery/ payment between the stock broker and
the client directly and such settlements should not take place through sub-broker.
Delivery of securities and payment of funds relating to the transactions of a client
introduced by the sub-broker should be directly between the stock broker and the
client of the sub broker.
Investor Service Cell
Investor complaints received against the trading members/ companies in respect of
claims/ disputes for transactions executed on the Exchange are handled by the
Investor Service Cell (ISC). The complaints are forwarded to the trading members for
resolution and seeking clarifications. The ISC follows-up with the trading members
and makes efforts to resolve the complaint expeditiously. In certain cases, on
account of conflicting claims made by the investor and the trading member, when it is
not possible to administratively resolve the complaint, investors are advised to take
recourse to the arbitration mechanism prescribed by the Exchange.
Arbitration, which is a quasi-judicial process, is an alternate dispute resolution
mechanism.
Code of Advertisement
Trading Members of the Exchange while issuing advertisements in the media have to
comply with the Code of Advertisement prescribed by the Exchange. In pursuance of
that, a copy of an advertisement has to be submitted to the Exchange to get a prior
approval before its issue in publication/media.
Advertisement/Material shall contain the Name of the Stock Broker, registered office
address of the member, SEBI Registration Number, Stock Broker ID allotted by
Exchange and logo of the Stock Broker, if any. It should also contain a standard
warning in legible fonts (minimum 10 font size) which states 'investments in
securities market are subject to market risks, read all the related documents
carefully before investing.' In audio-visual media­ based advertisements, the
standard warning in visual and accompanying voice over reiteration shall be audible
in a clear and understandable manner.
Advertisement/Material shall not contain any misleading or deceptive testimonials.
No celebrities shall form part of the advertisement/material. Statistical information,
charts, graphs, etc. when used should be supported by their source, if any.