Nism Sorm Notes Nov 2012 2.1 PDF

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Chapter 1: Introduction to the Securities Market

Securities market help in transfer of resources from those with idle resources to others who have a
productive need for them
A financial market consists of investors (buyers of securities), users of funds (sellers of securities),
intermediaries and regulatory bodies.
The securities market has two interdependent and inseparable segments, viz., the new issuers (the
primary market) and stock (secondary) market.
The primary market is used by issuers for raising fresh capital from the investors by making initial
public offers or rights issues or offers for sale of equity or debt; on the other hand the secondary
market provides liquidity to these instruments, through trading and settlement on the stock
exchanges
The resources in the primary market can be raised either through the private placement route or
through the public issue route by way of Initial Public Offer (IPO) or Follow on Public Offer (FPO).
It is a public issue, if anybody and everybody can subscribe for it, whereas, if the issue is made to
select group of people then it is termed as private placement. The secondary market on the other
hand operates through two mediums, namely, the Over-The-Counter (OTC) market and the
Exchange Traded Market. OTC markets are the informal type of markets where trades are
negotiated. In this type of market, the securities are traded and settled bilaterally over the counter.
Indian markets have recognized OTC exchanges like the OTCEI, however they do not give much
volumes. The other option of trading is through the stock exchange route, where trading and
settlement is done through the stock exchanges and the buyers and sellers don’t know each other
Money market is a market for financial assets that are close substitutes for money. It is a market
for short term funds and instruments having a maturity period of one or less than one year. Money
market provides short term debt financing and investment. The money market deals primarily in
short-term debt securities and investments, such as banker’s acceptances, negotiable certificates of
deposit (CDs), repos and Treasury Bills (T-bills), call/notice money market, commercial papers.
Government securities are also a part of the money market.
Equity Markets and its Products
Equity Shares represents the form of fractional ownership in a business venture.
Debentures are instruments for raising long term debt. Debentures in India are typically secured
by tangible assets. There are fully convertible, non-convertible and partly convertible debentures.
Warrants entitle an investor to buy equity shares after a specified time period at a given price.
Mutual Funds are investment vehicles where people with similar investment objective come
together to pool their money and then invest accordingly
Derivative Market and its Products

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Derivative is a product whose value is derived from the value of one or more basic variables, called
bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset
can be equity, forex, commodity or any other asset
At any point in time there are only three (3) contract months available for trading, with 1 month, 2
months and 3 months to expiry. These contracts expire on the last Thursday of the expiry month
and have maximum of 3 month expiration cycles. Quarterly contracts however have been
introduced only for index futures for 5 years. In case the last Thursday is a trading holiday, the
contracts expire on the previous trading day. A new contract is introduced on the next trading day
following the expiry of the near month contract. All these derivative trades are settled in cash.
Index/Stock Future is an agreement between two parties to buy or sell an asset at a certain time in
the future at a certain price
Index / Stock Options are of two types - calls and puts. Calls give the buyer the right, but not the
obligation, to buy a given quantity of the underlying asset, at a given price on or before a given
future date. Puts give the buyer the right, but not the obligation, to sell a given quantity of the
underlying asset at a given price on or before a given date
Currency Derivatives trading was introduced in the Indian financial markets with the launch of
currency futures trading in the USD-INR pair at the National Stock Exchange of India Limited on
August 29, 2008. As at end October 2010, currency futures are traded on the USD-INR, GBPINR,
EUR-INR and JPY-INR at the NSE, USE & MCX.
Commodity Derivatives markets are markets where raw or primary products are exchanged.
Interest Rate Futures trading is based on notional 10 year coupon bearing GOI security.
Foreign Stock Indices Derivatives – SEBI in January 2011 has permitted the stock exchanges to
introduce derivative contracts on the foreign stock indices.
Debt Market and its Products
Debt market consists of Bond markets, which provide financing through the issuance of Bonds,
and enable the subsequent trading thereof. Instruments like bonds/debentures are traded in this
market. Government securities are of two types- treasury bills and government dated securities.
Government Securities Market, Corporate Bond Market
The underlying bond in case of interest rate futures contracts is a notional 10 year, 7%
couponbearing GOI bond. The lot size, which is the minimum amount that can be traded on the
Exchange is 2000 bonds at the rate of Rs. 100 per bond. New contracts can be introduced by the
Exchange on any day of a calendar month. At the time of introduction, the duration of any contract
can vary from 1 month to 12 months. The contract cycle consists of 4 fixed quarterly contracts for
entire year expiring in March, June, September & December.
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In case of 91 days T-Bill the underlying is 91 day GOI T-Bill. The lot size is 2 Lakh. The contract
cycle consist of 3 monthly serial contracts followed by 3 quarterly contracts on March, June,
September and December
Chapter 2: Market Participants in the Securities Market
The four important participants of securities markets are the investors, the issuers, the
intermediaries and regulators
Investors in securities market can be broadly classified into Retail Investors and Institutional
Investors
Retail Investors are individual investors who buy and sell securities for their personal account, and
not for another company or organization. This category also includes High Networth Individuals
(HNI) which comprise of people who invest above rupees two lakh in a single transaction.
Institutional Investors comprise domestic Financial Institutions, Banks, Insurance Companies,
Mutual Funds and FIIs (A Foreign Institutional investor is an entity established or incorporated
outside India that proposes to make investments in India
Indian companies have raised resources from international capital markets through Global
Depository Receipts (GDRs)/American Depository Receipts (ADRs), Foreign Currency
Convertible bonds (FCCBs) and External Commercial Borrowings (ECBs).
GDRs are essentially equity instruments issued abroad by authorized overseas corporate bodies
against the shares/bonds of Indian companies held with nominated domestic custodian banks.
ADRs are negotiable instruments, denominated in dollars and issued by the US Depository Bank.
FCCBs are bonds issued by Indian companies and subscribed to by a non-resident in foreign
currency. They carry a fixed interest or coupon rate and are convertible into a certain number of
ordinary shares at a preferred price.
ECBs are commercial loans (in the form of bank loans, buyers, credit, suppliers credit, securitised
instruments, floating rate notes and fixed rate bonds) availed from any internationally recognised
source such as bank, export credit agencies, suppliers of equipment, foreign collaborators, foreign
equity holders and international capital market. Indian companies have preferred this route to raise
funds as the cost of borrowing is low in the international markets.
Latest development on reforms has allowed foreign companies to raise capital from Indian markets.
They can issue IDR (Indian Depository Receipts). This will be in rupee term and in similar nature
of IDR. Standard Chartered Bank is the first entity to raise capi-tal through issuing IDR.
The Securities Contract (Regulation) Act, 1956 (SCRA) defines ‘Stock Exchange’ as a body of
individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in securities.
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A Clearing Corporation / Agency is a part of an exchange or it can also be a separate entity, which
performs three main functions, namely, clearing and settling all transactions executed in the stock
market, i.e. completes the process of receiving and delivering shares/funds to the buyers and sellers
in the market, providing financial guarantee for all transactions executed on the exchange and
providing risk management functions. This process is called novation.
The clearing corporation acts as a central counterparty to all the trades.
Trading member means a member of a Stock Exchange and Sub-broker means any person not
being a member of Stock Exchange who acts on behalf of a trading member as an agent or
otherwise for assisting the investors in buying, selling or dealing in securities through such trading
members. Trading members can be individuals (sole proprietor), Partnership Firms,
Corporates and Banks
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• Can do both clearing & Trading

Trading cum Clearing Member • Can clear for other trading members also
• Can only do Clearing

Professional Clearing Member • No Trading
• Can Clear Own trades only

Self Clearing Member • Can not clear others trades
• Can only do Clearing

Custodian • Settles accounts of a client of Trading member
A Custodian is an entity that helps register and safeguard the securities of its clients. Besides
safeguarding securities, a custodian also keeps track of corporate actions on behalf of its clients. It
also helps in:
• Maintaining a client’s securities account

• Collecting the benefits or rights accruing to the client in respect of securities
• Keeping the client informed of the actions taken or to be taken by the issue of securities, having
a bearing on the benefits or rights accruing to the client
The capital adequacy requirements by a trading member comprises of the following two
components viz., Base Minimum Capital and the Additional or Optional capital related to the
volume of business. An absolute minimum of Rs. 5 lakh as a deposit is required to be kept with
the Exchange, which is irrespective of the volume of the business of the trading member
25% of the base minimum capital is to be maintained in cash with the exchange; another 25% in
the form of long term (3years or more) fixed deposit with the bank with which the stock exchange
has given complete lien; the remaining shall be in form of securities with 30% margin (the
securities should be in the name of members). The additional capital required at any point of time
shall be such that the base minimum capital is not less than 8% of the gross outstanding business
in the Exchange.
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Depository and Depository Participants (DPs)
There are two Depositories in India, Central Depository Services Limited (CDSL) and National
Securities Depository Limited (NSDL), which were established under the Depositories Act, for the
purpose of facilitating dematerialization of securities and assisting in trading of securities in the
demat form. The Depository provides its services to clients through its agents called depository
participants (DPs).
Regulators
• Securities and Exchange Board of India (SEBI) regulates the Securities Industry.
• Reserve Bank of India (RBI) is the authority to regulate and monitor the Banking sector.
• Insurance Regulatory and Development Authority (IRDA) regulates the Insurance sector.
• Pension Fund Regulatory & Development Authority (PFRDA) regulate the pension fund sector.
• Ministry of Finance (MOF)
• Ministry of Corporate Affairs (MCA)
Most of the powers under the SCRA are exercisable by DEA while a few others by SEBI. The
powers of the DEA under the SCRA are also concurrently exercised by SEBI. The powers in
respect of the contracts for sale and purchase of securities, gold related securities, money market
securities and securities derived from these securities and ready forward contracts in debt securities
are exercised concurrently by RBI. The SEBI Act and the Depositories Act are mostly administered
by SEBI. The rules under the securities laws are framed by Government and regulations by SEBI.
All these are administered by SEBI. The powers under the Companies Act relating to issue and
transfer of securities and non-payment of dividend are administered by SEBI in case of listed
public companies and public companies proposing to get their securities listed
SEBI Act, 1992
The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the
interests of investors in securities, (b) promoting the development of the securities market, and (c)
regulating the securities market.
Securities Contracts (Regulation) Act, 1956
It provides for direct and indirect control of virtually all aspects of securities trading and the
running of stock exchanges and aims to prevent undesirable transactions in securities. It gives
Central Government regulatory jurisdiction over (a) stock exchanges through a process of
recognition and continued supervision, (b) contracts in securities, and (c) listing of securities on
stock exchanges.
Depositories Act, 1996
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The Depositories Act passed by Parliament received the President's assent on August 10, 1996.
The Depositories Act facilitated the establishment of the two depositories in India viz., NSDL and
CDSL. Only a company registered under the Companies Act, 1956 and sponsored by the specified
category of institutions can set up a depository in India. Before commencing operations,
depositories should obtain a certificate of registration and a certificate of commencement of
business from SEBI. A depository established under the Depositories Act can provide any service
connected with recording of allotment of securities or transfer of ownership of securities in the
record of a depository. A depository however, cannot directly open accounts and provide services
to clients. Any person willing to avail of the services of the depository can do so by entering into
an agreement with the depository through any of its Depository Participants.
Companies Act, 1956

The Companies Act of 1956 deals with issue, allotment and transfer of securities and various
aspects relating to company management. It provides for standard of disclosure in public issues of
capital, particularly in the fields of company management and projects, information about other
listed companies under the same management, and management perception of risk factors. It also
regulates underwriting, the use of premium and discounts on issues, rights and bonus issues,
payment of interest and dividends, providing annual reports and other information.
Prevention of Money Laundering Act, 2002
The term money-laundering is defined as “whoever acquires, owns, possess or transfers any
proceeds of crime; or knowingly enters into any transaction which is related to proceeds of crime
either directly or indirectly or conceals or aids in the concealment of the proceeds or gains of crime
within India or outside India
The offences are classified under Part A, Part B and Part C of the Schedule of the Act. Under Part
A, offences include counterfeiting currency notes under the Indian Penal Code (IPC) to punishment
for unlawful activities under the Unlawful Activities (Prevention) Act, 1967. Under Part B,
offences are considered as money laundering if the total value of such offences is Rs 30 lakh or
more.Part C includes all offences under Part A and Part B (without the threshold) that has cross-
border implications
Section 12 of PMLA stipulates that every banking company, financial institution and intermediary
shall maintain a record of all the following transactions
All cash transactions of the value of more than Rs. 10 lakh or its equivalent in foreign currency.
All series of cash transactions integrally connected to each other which have been valued below Rs. 10 lakh
or its equivalent in foreign currency where such series of transactions take place within one calendar month
and the aggregate value of such transaction exceeds Rs. 10 lakh.
All suspicious transactions whether or not made in cash.
The offence of money laundering is punishable with rigorous imprisonment for a term which shall
not be less than 3 years but which may extend to 7 years and shall also be liable to fine which may
extend to Rs. 5 lakh.
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Sections Details
Section 6 Central Government can appoint Adjudicating Authorities
If the Adjudicating Authority (AA) passes order of confiscation of any property, then
Section 9
all the rights and title in such property shall be with the Central Government
Section 11 Adjudicating Authority shall have the same powers as are vested in a civil court
every banking company, financial institution and inter-mediary shall maintain a record
Section 12
of all the big & suspicious transactions
Section 16 &
powers of the authorities to carry out surveys, searches and seizures
17
when a person is accused of having engaged in money-laundering, the burden of
Section 24
proving that the proceeds of the alleged crime are untainted shall be on the accused
Section 25 &
establishment of an Appellate Tribunal and the procedures for filing an appeal
26
Section 42 deals with appeals against any decision or order of the Appellate Tribunal
empowers the Central Government to designate Courts of Session as Special Courts
Section 43
for the trial of the offence of money-laundering
SEBI (Prohibition of Insider Trading) Regulations, 1992 Insider Trading is considered as an

offence and is hence prohibited as per the SEBI (Prohibition of Insider Trading) Regulations, 1992.
The same was amended in the year 2003. The act prohibits an insider from dealing (on his behalf
or on behalf of any other person) in securities of a company listed on any stock exchange, when in
possession of any unpublished price sensitive information. Further, it also prohibits any insider
from communicating, counseling or procuring directly or indirectly any unpublished price
sensitive information to any outside person. Price sensitive information means any information
which is related directly or indirectly to a company and which if published is likely to materially
affect the price of securities of a company. It includes information like periodical financial results
of the company, intended declaration of dividends (both interim and final), issue of securities or
buy-back of securities, any major expansion plans or execution of new projects, amalgamation,
merger or takeovers, disposal of the whole or substantial part of the undertaking and significant
changes in policies, plans or operations of the company
Chapter 3: Introduction to Securities Broking Operations
a trade is the conversion of an order placed on the exchange which results into pay-in and payout of
funds and securities. Trade ends with the settlement of the order placed.
The following steps are involved in a trade’s life cycle:

1. Placing of Order
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2. Risk management and routing of order
3. Order matching and its conversion into trade
4. Affirmation and Confirmation (only for institutional deals)
5. Clearing and settlement
3
In the year 2008, SEBI permitted the facility of Direct Market Access for institutional clients .
DMA is a facility which allows brokers to offer its institutional clients direct access to the exchange
trading system through the broker’s infrastructure. This does not involve any manual intervention
of the broker.
All the institutional trades executed on the stock exchanges would be mandatorily processed
through the Straight through Processing System (STP) w. e. f. July 01, 2004. STP is a mechanism
that automates the end-to-end processing of transactions of the financial instruments. It involves
use of a single system to process or control all elements of the work-flow of a financial transaction,
including what is commonly known as the Front, Middle, and Back office, and General Ledger.
STP can be defined as electronically capturing and processing transactions in one pass, from the
point of first ‘deal’ to final settlement.
Contract Notes
A contract note is a confirmation of trade done on a particular day for and on behalf of a client. It
establishes a legally enforceable relationship between the stock broker and the client in respect of
settlement of trades executed on the exchange as stated in the contract note. Every trade executed
by a stock broker on behalf of his client should be supported by a contract note. Contract note
should be issued within 24 hours and in the format prescribed by exchanges/SEBI. These should
be issued in physical form or electronic form depending on the mode chosen by client. In the case
of Electronic Contract Note (ECN), log of sending ECN to client’s email id should be maintained.
They should be issued with the client’s name and client’s code written on them. It should also
contain the exact order number, order entry time, trade number, trade time, quantity of securities
transacted, rates/price, etc. Contract notes with weighted average rates of trade should contain an
annexure with the details thereon. Electronic contract notes should be issued only if the client has
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pre-authorized the stock broker. The contract note should be digitally signed, encrypted, non-
tamperable, and in accordance with the Information Technology Act, 2000. The contract notes
should be signed by stock broker or by an authorised signatory of the stock broker.
Contract should also mention all statutory charges like Securities Transaction Tax (STT), Service
Tax (ST), Education Cess, SEBI & Exchange charges, etc. Contract notes should be affixed with
the brokers note stamps, as a percentage of the total value of the contract, as per the respective
state government stamp acts / rules. Contract note also should clearly specify the complete address,
phone numbers, e-mail IDs, fax numbers, Depository Participant ID (DP-ID), Pool A/C details, etc
of the broker alongwith the PAN.
In India, we follow the T+2 Rolling Settlement, which means that the brokers settle the transactions
on the second day from the trade day
Front Office Operations
The front office is responsible for trade capture and execution. This is where the trade originates
and the client relationship is maintained. The front office makes/takes orders and executes them.
Traders and sales staff are considered front office staff. Account Opening - Documents Required
1. Index of Documents
2. Client Account opening form ( KYC & Additional Information)
3. Rights & Obligation of Stock broker, sub broker & client
4. Uniform Risk Disclosure Documents (RDD)
5. Guidance Note – Do’s and Don’ts
KYC is an acronym for “Know your Client”, a term commonly used for Customer Identification
Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions
and Financial Intermediaries including Mutual Funds and Stock Brokers to ‘know’ their clients.
This entails verification of identity and address, financial status, occupation and such other
personal information as may be prescribed by guidelines, rules and regulation.
UID – Unique Identification Number (Aadhaar) can be a proof of Identity.
Normally the client prefers to open both trading and demat account with the same broker. In that
case the client is willing to give Power of Attorney (POA) in favour of broker for smooth
functioning it has to
The retail clients normally do not wish to exchange cheques to and fro for every contract. They
prefer to settle the account with the broker at periodic interval. To facilitate this SEBI has approved
brokers to collect running authority letter from the client. In spite of this letter the broker should
settle the accounts at least once a quarter or earlier
Unique Client Code

Once the formalities of KYC and other details thereon are complete, each client is assigned a
unique client code (UCC) by the broker. This acts as an identity for the client with respect to the
broker.
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KRA – Know Your Client Registration Agency
The new KRA system was developed for centralization of KYC records in the securities markets.
It is applicable from January 1, 2012. The members may upload the KYC data on the KRA system
and send the relevant KYC documents within 10 working days.
Order Management
Order management consists of entering orders, order modification, order cancellation and order
matching. The main components of an order are:
• Price
• Time
• Quantity
• Security (What to buy and what to sell))
• Action (Buy / Sell)
• Client identity (UCC)
Types of order
Price, time and quantity are three major components of an order
A market order is where a trader purchases or sells their security at the best market price available.
In the market order there is no need to specify the price at which a trader wants to purchase or sell.
Market order without Protection – Best available price in the market at that time
Market order with Protection – Best Available price within a specified range
Limit Order - Buying at a Lower Price/Selling at a Higher Price Limit orders involve setting
the entry or exit price and then aiming to buy at or below the market price or sell at or above it.
Unlike market order, the trader here needs to specify atleast one price.
There is one more variation in Limit order called IOC (immediate or cancel)
Types of Risk
Operational risk is the risk of monetary loss resulting from inadequate or failed internal
processes, people and systems or external events. For the stock broker, operations risk is
essentially counter-party risks such as non-payment, non-delivery of scrip, denial of matched
order by client/s, trading errors, and sudden closure of banks where funds are deposited.
Market risk refers to the possibility of incurring large losses from adverse changes in financial
asset prices such as stock prices or interest rates. This risk entails the erosion of value of marketable
securities and assets, due to factors beyond an enterprise’s control. Market risk is usually affected
by economic developments, political destabilization, rising fiscal gap, and national debt, terrorism,
energy price shocks, increase in interest rates, all resulting in a drop in equity prices.
Regulatory risk occurs when the rules governing the securities industry are changed, giving rise
to potential loss. For example, the ‘customer first’ policy makes it difficult to trade house accounts
and therefore a broker may not be able to liquidate a position immediately, leading to potential or
actual loss
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The back office exists for three reasons: confirmation, payments, settlements and accounting. In
other words, the back office monitors the post-market processing of transactions. The back office
is where the trade ends
Trade Enrichment
Trade Enrichment is performed automatically after each trade execution. In this step, all necessary
details for the clearing of futures and option contracts, or the settlement of cash securities are added.
Trade enrichment is defined as process of including additional information in one instruction in a
trade which is already being executed. Instructions can be enriched either before or after matching.
Instructions could include adding specific and relevant data of counterparty, settlement instruction,
etc
Trade Allocation
For example, hedge fund makes a trade, and manages several portfolios. Often, they will choose
to allocate their trade to various portfolios for a number of reasons
Clearing and Settlement Process
Clearing and Settlement is a post trading activity that constitutes the core part of equity trade life
cycles
Clearing house is an entity through which settlement of securities takes place. The details of all
transactions performed by the brokers are made available to the Clearing House by the Stock
Exchange. Pay-In is a process whereby a stock broker and Custodian (in case of Institutional deals)
bring in money and/or securities to the Clearing House. This forms the first phase of the settlement
activity Pay-Out is a process where Clearing House pays money or delivers securities to the brokers
and Custodians. This is the second phase of the settlement activity In India, the Pay-in of securities
and funds happens on T+ 2 by 11 AM, and Pay-out of securities and funds happen on T+2 by 3
PM.
Accounting
The stock brokers are required to maintain books of account as prescribed by the Securities
Contracts (Regulation) Rules, SEBI (Stock brokers and Sub-brokers) Regulations and
requirements of Exchanges. These are to be maintained for a minimum period of 5 years
For a minimum of 7 years, the stock broker has to maintain a mapping of the client IDs used at the
time of order entry in the system with the client’s unique client ID along with all the particulars
given in the KYC form.
The register of transactions (sauda book) is to include each transaction effected. This would show
the name of the security, its value, rates gross and net of brokerage and names of the clients.
• The client’s ledger, as the name suggests, has the details of all clients, and their transactions
through the broker.
• The general ledger accounts for all general transactions including expenses, overheads
salaries, petty cash, etc.
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• The journal is the accounting book of the general ledger. Any adjustment entries for e.g.,
interest receivable, etc., is accounted here.
• The cash and bank book contain records of all cash and cheque transactions and are normally
balanced daily.
• The securities register is required to be maintained client-wise and scrip-wise. The details
provided would include date of receipt/delivery of the security, quantity received/delivered,
party from whom delivered/to whom delivered, the purpose of receipt/delivery and the
balance quantity.
• A contract note is a confirmation of trade done on a particular day for and on behalf of a
client. A contract note issued in the format and manner prescribed by the exchanges
establishes a legally enforceable relationship between the stock broker and the client in
respect of settlement of trades executed on the exchange as stated in the contract note. The
copies of the original contract notes issued to the client are to be maintained by the broker.
• The margin deposit book contains details of margins paid and collected and payable and
collectable.
Chapter 4: Risk Management

The main concepts of a Risk Management System are listed below:
• There should be a clear balance available in the client’s ledger account in the broker’s books.
• The clients are required to provide margins upfront before putting in trade requests with the
brokers.
• The aggregate exposure of the client’s obligations should commensurate with the capital and
networth of the broker.
• Ideally, the client must square-up all the extra positions that have been created on an intra-day
basis before 3.00 p.m.
• The clients must settle the debits, if any, arising out of MTM settlements.
• In futures and options segment, the positions are allowed based on the margin available to satisfy
initial margin requirements of the Exchange
Base minimum capital/ Additional Base Capital
Base Minimum capital is the deposit a stock broker has to make with the stock exchange to get
trading rights on the exchange. Even then, the broker may take positions (the sum of his and
his clients') only up to a prespecified multiple of this deposit amount.
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As per the SEBI (Stock Brokers and Sub-Brokers) Regulations, an absolute minimum of Rs. 5 lakh
as a deposit with the Exchange shall be maintained by member brokers of the Bombay and Calcutta
Stock Exchange, and Rs. 3.5 lakhs by the Delhi and Ahmedabad Stock Exchanges.
The additional or optional capital required of a member shall at any point be such that together
with the base minimum capital it is not less than 8%of the gross outstanding business in the
Exchange.
NSE Capital & NSE Capital & MCX - Capital MCX -

Derivatives Derivatives Market & Currency
Segments ->
Segment - Segment - Derivatives Derivatives
Corporate Individual segment segment
20 Lakhs + 20
IFSD 125 Lakhs 25 Lakhs Lakhs 10 Lakhs
CSD 25 Lakhs 25 Lakhs 50 Lakhs 50 Lakhs
Internal client account control

The stock broker shall segregate client funds from it’s own funds. Stock broker shall keep the
client’s money in a separate bank account designated as client account and their own money in a
separate bank account
Margin Requirements – On what Basis it is Calculated
The Exchange levies daily margin, Mark-to-Market (MTM) margin, Extreme loss margin in the
equities segment and initial margin and MTM margin in case of futures and options segment.
Initial Margin is calculated on a portfolio basis and not on individual scrip basis. The margin
calculation is done using SPAN (Standard Portfolio Analysis of Risk) a product developed by
Chicago Mercantile Exchange. The margin is levied at trade level on real-time basis. The rates are
computed at 5 intervals one at the beginning of the day 3 during market hours and one at the end
of the day. The objective of SPAN is to identify overall risk in a portfolio of futures and options
contracts for each client.
Initial margin requirements are based on 99% value at risk over a one-day time horizon
Exposure Margin is based on a single percentage on the value of the scrip determined at the
beginning of every month for the following month by the exchange. This is charged over and above
the initial margin and is popularly referred as second line of defence
Standard Portfolio Analysis of Risk (SPAN) Developed by the Chicago Mercantile Exchange in
1988, the Standard Portfolio Analysis of Risk (SPAN) performance bond margining system for
calculating margin requirements has become the futures industry standard
The index VaR, for the purpose, is the higher of the daily Index VaR based on S&P CNX NIFTY
or BSE SENSEX, subject to a minimum of 5%.
Extreme Loss Margin
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The Extreme Loss Margin for any security is higher of 5%, or 1.5 times the standard deviation of
daily logarithmic returns of the security price in the last six months
The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the member on a
real time basis. The Extreme Loss Margin is collected on the gross open position of the stock
broker. The gross open position for this purpose means the gross of all net positions across all the
clients of a member including its proprietary position
Section 15A of the SEBI Act, 1992, prescribes penalty for failure to furnish information, return,
etc. It reads as under: If any person, who is required under this Act or any rules or
regulations made thereunder,
(a) to furnish any document, return or report to the Board, fails to furnish the same, he shall be
liable to a penalty of one lakh rupees for each such day during which such failure continues or one
crore rupees, whichever is less
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
Submission of various periodic reports
These include:
• System Audit Report - By 31 July yearly
• Annual Returns - Within 6 months from the end of accounting year
• Client wise Funding Report -Within seven days form the end of the month
• Internal Audit Report Half yearly basis -Within 3 months from half year ended March and
September
• Net worth certificate Half yearly basis - Within 3 months from half year ending
• Networth certificate in Margin Trading for CM Segment-Within one month from the end of half
year
• Proof of Insurance cover - By July 31 yearly
• Client details for Margin Trading facility - Before 9:00pm on the trade day
Chapter 5: Clearing Process

The clearing process follows the trading process.
1. At the end of the day’s trade, all details about the trades are sent by the stock exchanges to
the clearing house/corporation.
2. The clearing corporation/house then groups the trades under the various clearing members
and informs them about the transactions of their clients.
3. The clearing members then confirm back regarding the trades by 11.00 a.m. the next day.
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4. The clearing house/corporation then performs multilateral netting and determines the
obligations of all clearing members. These details are then sent to the clearing members by
1.30 p.m.
The National Securities Clearing Corporation Limited (NSCCL) takes care of the clearing and
settlement on NSE. It is a fully owned subsidiary of NSE and is called the clearing
corporation.
The Bank of India Share Holding Limited (BOISL) takes care of the clearing and settlement on
BSE. It is a subsidiary of BSE and Bank of India and is called the clearing house. MultiCommodity
Exchange- Stock Exchange (MCX-SX) Clearing Corporation Ltd. is the clearing corporation for
all the trades executed on the MCX-SX.
Once this is done, the clearing agency then determines the net obligations of the clearing members
through multilateral netting.
It is mandatory for clearing members to open demat accounts with both the depositories, i.e., CDSL
and NSDL. This account is called a clearing member account. Separate accounts are to be opened
for all the exchanges
In the depository system both transferor and transferee have to give instructions to its depository
participants [DPs] for delivering [transferring out] and receiving of securities. However, transferee
can give 'Standing Instructions' [SI] to its DP for receiving in securities. If SI is not given,
transferee has to give separate instructions each time securities have to be received. Transfer of
securities from one account to another may be done for any of the following purposes: a. Transfer
due to a transaction done on a person to person basis is called 'off-market' transaction. b. Transfer
arising out of a transaction done on a stock exchange. c. Transfer arising out of transmission and
____________________________________________________________________________
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account closure. A beneficiary account can be debited only if the beneficial owner has given
'Delivery Instruction' [DI] in the prescribed form.
Any trade that is cleared and settled without the participation of a clearing corporation is
called off-market trade
A market trade is one that is settled through participation of a Clearing Agency clearing and
settlement process can be classified into: Matching, Central counterparty, Cash settlement and
Delivery Matching means that the parties agree on the conditions of the transaction, i.e. what has
been bought or sold, price, quantity, etc. ‘Central counterparty clearing’ is when the clearing
organization becomes the legal counterparty in a transaction. Cash settlement refers to settlement
of premiums, fees, mark-to-market and other cash settlements, and delivery of the underlying
instrument or cash settlement occurs after expiration or premature exercise.
As central counterparty, the clearing agency:

• Participates as counterparty in every transaction, which is commonly referred to as a
‘counterparty undertaking
• Reduces the number of payments due to netting and handles all payments not relating to
deliveries on behalf of members.
• Provides possibilities to net deliveries of underlying stocks on a member level compared
with netting of payments, which are always netted.
The time line followed for the custodian settled trade for institutional clients is as follows:
• T is trade date by broker
• On T+1 morning Trade confirmation to broker ( exchange obligations move from broker
to custodian)
• On T+1 evening payment of margins. Usually it is 100% of funds/ securities
• On T+2/T+3 credit of shares /funds to client account
A TMs open position is arrived at as the summation of his proprietary open position and client’s
open positions, in the contracts in which they have traded
All derivatives contracts irrespective of whether it is index futures, stock futures, index options,
stock options or currency futures and options are cash settled. The settlement amount for a clearing
member is netted across all their TMs/Clients with respect to their obligations on Markto-Market
settlement
Chapter 6: Settlement Process

T+2 settlement cycle is followed in the Indian equities market, i.e. which means that a transaction
entered into on Day 1 has to be settled on the Day 1 + 2 working days, when funds pay in or
securities pay out takes place. 'T+2" here, refers to Trade day + 2 working days.
The settlement of derivative trades is on T + 0 or T + 1 working day basis. Final settlement of
Currency derivatives is T + 2 days. Members with a funds pay-in obligation are required to have
____________________________________________________________________________
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clear funds in their primary clearing account on or before 10.30 a.m. on the settlement day. The
payout of funds is credited to the primary clearing account of the members thereafter
Settlement Price for derivatives is given in the following table:
Product Settlement Price

Futures Contracts on Index Daily Closing price of the futures contracts on the trading
or Individual Security Settlement day (closing price for a futures contract shall be
calculated on the basis of the last half an hour
weighted average price of such contract).
Un-expired illiquid futures Daily Theoretical Price computed as per formula F=S *ert
contracts Settlement
Futures Contracts on Index Final Closing price of the relevant underlying index /
or Individual Securities Settlement security in the Capital Market segment of NSE, on
the last trading day of the futures contracts.
Options Contracts on Interim Closing price of such underlying security on the day
Individual Securities Exercise of exercise of the options contract.
Settlement
Options Contracts on Index Final Closing price of such underlying security (or index)
and Individual Securities Exercise on the last trading day of the options contract.
Settlement
USD INR Currency Daily Closing price of the futures contracts for the trading
Derivatives Settlement day.
Final Settlement Price The reference rate fixed by RBI.
The member can download these reports on second day of the Settlement end date.
• Statement of scrip-wise net deliveries to be made by the member.
• Statement of scrip-wise net deliveries to be received by the member.
• Balance Sheet showing the net receivable or net payable by the Member.
The Members has to deliver the Securities (otherwise known as Securities pay-in) to the Exchange
as per the Statement of scrip-wise net deliveries downloaded by them.
Margin Payment
The initial and exposure margin is payable upfront by Clearing Members. Initial margins can be
paid by members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts and approved
securities.
____________________________________________________________________________
==================================================================
Settlement through the Depository Clearing System
The securities pay in takes place on the T+2 day after the trade date. Members have to de-liver the
shares by 10.30 a.m. on the pay in date through their depository participant. The securities pay in
takes place through both Depositories simultaneously.
The securities pay out takes place on the same date as the securities pay in date i.e. in the T+2
working days after the trade date. The securities pay-out is done simultaneously through both
depositories and the process is usually completed by 1.30 p.m.
Corporate Actions to be adjusted
The corporate actions may be broadly classified under stock benefits and cash benefits.
The various stock benefits declared by the issuer of capital are:
• Bonus • Rights • Merger / De-merger • Amalgamation • Splits • Consolidations • Hive-off
• Warrants, and • Secured Premium Notes (SPNs) among others.

The cash benefit declared by the issuer of capital is cash dividend
Adjustment
Adjustments may entail modifications to positions and / or contract specifications as listed below,
such that the basic premise of adjustment laid down above is satisfied: a) Strike Price b) Position
c) Market Lot / Multiplier
Adjustment factor: Adjustment factor : (A+B)/B

Bonus - Ratio A:B
Stock Splits and Consolidations Adjustment factor : A/B
Ratio - A : B
Dividends
Dividends which are below 10% of the market value of the underlying stock, would be deemed to
be ordinary dividends and no adjustment in the Strike Price would be made for ordinary dividends.
For extra-ordinary dividends, above 10% of the market value of the underlying security, the Strike
Price would be adjusted. To decide whether the dividend is "extra-ordinary" (i.e. over 10% of the
market price of the underlying stock.), the market price would mean the closing price of the scrip
on the day previous to the date on which the announcement of the dividend is made by the
Company after the meeting of the Board of Directors
An Auction Tender Notice is issued by BSE to the Members informing them about the names of
the scrips short or not delivered, quantity slated for auction and the date and time of the auction
session on the BOLT. The auction for the undelivered quantities is conducted on T+2 day between
2 pm and 2.45pm for all the scrips under Compulsory Rolling Settlements except those in "Z"
group and scrips on "trade for trade" basis which are directly closed-out.
____________________________________________________________________________
==================================================================
Chapter 7: Investor Grievances and Arbitration
When a complaint is filed by the investor, care is taken to settle the matter at the branch level or
the firm level depending upon the nature of the complaint. In case the complainant is unsatisfied
then the same is taken to the Exchange or the SEBI. The Exchange normally has an Investor
Grievance Redress Committee (IGRC) / Investor Services Cell which looks into all the complaints
/matters against the trading members registered with the Exchange.
Arbitration, which is a quasi judicial process, is an alternate dispute resolution mechanism
prescribed under the Arbitration and Conciliation Act, 1996
The Exchanges have a panel of arbitrators that consists of retired judges from High-Courts,
Chartered Accountants, Advocates and other Professionals having knowledge related to the Capital
Markets
Arbitration for claims up to Rs. 25 lakh is decided by a sole arbitrator while a claim of above Rs.
25 lakh is dealt by a panel of 3 arbitrators. The stock exchange has to ensure that the process of
appointment of arbitrator(s) is completed within 30 days from the date of receipt of application
from the applicant
The Award has to be a Speaking Award . Ex-parte Awards are also given. The Final Award is
taken on stamp paper of Rs. 100
Speaking awards are those awards which are passed upon hearing both the parties i.e. the
complainant and the respondent. This is unlike the Ex-parte award, wherein one party does not
attend the proceedings even upon being served the notice and the arbitrators have to pass a decision
based on a documents and arguments given by one party.
Arbitration Fees Each of the parties to arbitration must deposit an amount (as prescribed by the
Exchanges) at the time of making an arbitration reference. The deposits may not exceed the amount
as indicated under.
Amount of claim /counter If claim is filed within six If claim is filed after six
claim (whichever is higher) months months
≤ 10,00,000 1.3% subject to a minimum of 3.9% subject to a minimum of
Rs. 10,000 Rs. 30,000
> 10,00,000 - ≤ 25,00,000 Rs. 13,000 plus 0.3% amount Rs. 39,000 plus 0.9% amount
above Rs. 10 lakh above Rs. 10 lakh
≥25,00,000 Rs. 17,500 plus 0.2% amount Rs. 52,500 plus 0.6% amount
above Rs. 25 lakh subject to a above Rs. 25 lakh subject to
maximum of Rs. 30,000 maximum of Rs. 90,000
A party aggrieved by the appellate arbitral award may file an application to the Court of competent
jurisdiction in accordance with Section 34 of the Arbitration and Conciliation Act, 1996.
Normally, a stock broker’s outlet offers these facilities:
• Online BSE and NSE executions through terminals • Investment advice
____________________________________________________________________________
==================================================================
• Research reports and market review • Personalised Advice • Mobile Trading
• Live Market Information • Depository Services • Direct Market Access
• Derivatives Trading • Commodities Trading • Smart Order Routing
• IPOs & Mutual Funds Distribution • Internet-based Online Trading
• Specialised Research For Investors • Margin Funding • Algorithmic Trading
The Book Running Lead Manager will give the list of trading members who are eligible to
participate in the Book Building process to the Exchange The lead merchant bankers appointed by
the Issuer Company are referred to as the Book Running Lead Managers. The names of the Book
Running Lead Managers are mentioned in the offer document of the Issuer Company.
SEBI have introduced a facility called “Application Supported by Blocked Amount (ASBA)”
in the Primary market for investor. ASBA provides an alternative mode of payment in issues
whereby the application money remains in the investor’s account till finalization of basis of
allotment in the issue, or in other words, if an investor is applying through ASBA, his application
money is debited from the bank account only if the investors application is selected for allotment
after the basis of allotment is finalized, or the issue is with-drawn/failed.
ASBA process facilitates retail individual investors bidding at cut-off, with single option, to apply
through Self Certified Syndicate Banks (SCSBs), in which the investors have bank accounts.
SCSBs are those banks which satisfy the conditions laid by SEBI. SCSBs would accept the
applications, verify the application, block the fund to the extent of bid payment amount, upload
the details in the web based bidding system of the Exchange, unblock
The trading members who are AMFI Registration Number (ARN) holders and have passed the
AMFI certification examination are permitted to participate in the trading of the Mutual Funds
units through the Exchange trading platform. Further, eligible members would have to register as
distributor with the Mutual Fund Company. Hence, eligible members would be able to place orders
only in respect of Mutual Fund Companies where they have registered as distributor
The NSE and BSE have the following designated trading platforms for Mutual Fund viz., the
Mutual Funds Service System (MFSS) and the BSE Star MF respectively
The stock broker can request following types of subscription/ redemption requests:
• Physical Subscription – Fresh (first time)
• Physical Subscription – Additional
• Depository Subscription – Fresh (first time)
• Depository Subscription – Additional

• Physical Redemption
• Depository Redemption
No subscription/ redemption order should be entered with amount equal to or greater than Rs. 1
crore
____________________________________________________________________________
==================================================================
Many stock brokers also offer Portfolio Management Services (PMS) to their clients. For this, a
PMS license has to be obtained by them. This is normally offered to High Networth Individuals
(HNIs).
Portfolio manager can be discretionary or non-discretionary. The discretionary portfolio manager
individually and independently manages the funds of each client, whereas the non-discretionary
portfolio manager manages the funds in accordance with the directions of the client.
SEBI fee structure & Eligibility criteria
• Non-refundable Application fee ( Renewal / Registration )- Rs. 1 lakh.
• Initial Registration fee – Rs10 Lakhs
• Minimum of 2 persons with atleast 5 years experience as portfolio manager or stock broker
or investment manager or in the areas related to fund management.
• The principal officer of the portfolio manager is to have: (i) a professional qualification in
finance, law, accountancy or business management OR (ii) an experience of at least 10
years in the securities market
• Minimum networth of portfolio manager - 2 crore rupees.
• Every portfolio manager who has total assets more than 500 cr rupees shall appoint a
custodian. This condition will not be applicable to portfolio managers offering purely
advisory services.
• Min Investment that a portfolio manager can accept from clients – Rs 25 Lakhs
The main activity being the settlement and transfer of securities from one beneficiary account to
another pursuant a trading activity of an investor. There are other services also which a DP can
engage into such as:
• Dematerialization: Dematerialisation is the process of converting securities held in physical

form into holdings in book entry form.
• Transfer and Registration: A transfer is the legal change of ownership of a security in the
records of the issuer. For effecting a transfer, certain legal steps have to be taken like
endorsement, execution of a transfer instrument and payment of stamp duty, which the DP
helps the investors in.
• Corporate Actions: DP’s handle corporate actions on behalf of their depositories. In the
first case, it merely provides information to the issuer about the persons entitled to receive
corporate benefits. In the other case, the DP’s on depository instructions takes the
responsibility of distribution of corporate benefits.
The "total exposure" of the broker towards the margin trading facility should not exceed the
borrowed funds and 50 per cent of his "net worth". While providing the margin trading facility,
the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the "total
____________________________________________________________________________
==================================================================
exposure" of the broker. Initial margin has been prescribed as 50% and the maintenance margin
has been prescribed as 40%.
IMPORTANT NOTE :
1. Attend ALL Questions

2. For the questions you don’t know the right answer – Try to eliminate the wrong answers and
take a guess on the remaining answers.
3. DO NOT MUG UP the question & answers. It’s not the right to way to prepare for any NISM
exam. Good understanding of Concepts is essential.
4. Remember to attend NISM CPE session before the end of 3 years from the date of exam.
All the Best 

AKSHAYA INVESTMENTS
Invest anywhere. Consult us.
94, First Floor, TPK Road, Andalpuram, Madurai – 625 003.

Email: akshayatraining@gmail.com
Ph: (0) 98949 49987, (0) 98949 49988
www.modelexam.in
(CLICK THE LINK ABOVE TO PROCEED TO WEBSITE)
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Chapter 1: Introduction to the Securities Market

Equity Markets and its Products

Equity Shares represents the form of fractional ownership in a business venture.

Derivative Market and its Products

Debt Market and its Products

Government Securities Market, Corporate Bond Market

Chapter 2: Market Participants in the Securities Market

The clearing corporation acts as a central counterparty to all the trades.

• Can do both clearing & Trading

• Can only do Clearing

• Can Clear Own trades only

• Can only do Clearing

• Maintaining a client’s securities account

SEBI Act, 1992

Securities Contracts (Regulation) Act, 1956

Depositories Act, 1996

Companies Act, 1956

Prevention of Money Laundering Act, 2002

All suspicious transactions whether or not made in cash.

SEBI (Prohibition of Insider Trading) Regulations, 1992 Insider Trading is considered as an

Chapter 3: Introduction to Securities Broking Operations

The following steps are involved in a trade’s life cycle:

Unique Client Code

Chapter 4: Risk Management

Base minimum capital/ Additional Base Capital

NSE Capital & NSE Capital & MCX - Capital MCX -

CSD 25 Lakhs 25 Lakhs 50 Lakhs 50 Lakhs

Internal client account control

Chapter 5: Clearing Process

As central counterparty, the clearing agency:

Chapter 6: Settlement Process

Settlement Price for derivatives is given in the following table:

Product Settlement Price

• Bonus • Rights • Merger / De-merger • Amalgamation • Splits • Consolidations • Hive-off

• Warrants, and • Secured Premium Notes (SPNs) among others.

Adjustment factor: Adjustment factor : (A+B)/B

• Physical Subscription – Additional

• Depository Subscription – Fresh (first time)

• Depository Subscription – Additional

• Dematerialization: Dematerialisation is the process of converting securities held in physical

1. Attend ALL Questions

All the Best 

94, First Floor, TPK Road, Andalpuram, Madurai – 625 003.

TRIAL PLAN : Rs 99 for 2 Online Model Tests

PLAN A : Rs 300 for 10 Online Model Tests

PLAN B : Rs 500 for 20 Online Model Tests

Discounts available on Bulk Booking for Corporates & Colleges

NO HARDCOPY / SOFTCOPY of the tests will be provided

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