NOTICE
CSE/Notices/SEBI/2012/120
December 17, 2012
Trading members are hereby informed that
the Exchange has received a Circular from SEBI vide Ref. No. CIR/MRD/DP/34/2012, dated December
13, 2012 regarding Pre-trade Risk Controls. The contents of the said Circular are reproduced hereunder for
information of trading members.
Quote : -
CIRCULAR
CIR/MRD/DP/34/2012
December 13, 2012
To
All Stock
Exchanges.
Dear Sir / Madam,
1. SEBI has issued various circulars from time to time to implement risk management in cash market and equity derivatives segments. Stock exchanges have operationalised these measures by putting in place checks to be carried out at their end and by the stock brokers.
2. The
recent incidents of erroneous orders have brought to fore certain areas that require additional risk control measures to mitigate
disruption of trading at the exchanges.
3. In view of the above, SEBI engaged in a consultative process with the market participants, stock exchanges, its Risk Management Review Committee (RMRC) and Technical Advisory Committee (TAC). Global practices in this regard were also studied.
4. Pursuant to the above, it has been decided to prescribe a framework of dynamic trade based price checks to prevent aberrant orders or uncontrolled trades. These measures would be implemented in phases in order to ensure the Indian stock exchanges deploy latest technology while maintaining adequate controls. As an initial measure, it has been decided that stock exchanges shall implement the measures as given below.
Order-level checks
5.
Minimum pre-trade risk controls for all categories of orders placed on Stocks,
Exchange Traded Funds (ETFs), Index Futures and Stock futures shall be as
follows:
5.1.
Value/Quantity Limit per order:
(a) Any order with value exceeding Rs. 10 crore per order shall not be accepted by the stock exchange for execution in the normal market.
(b) In addition, stock exchange shall ensure that appropriate checks for value and / or quantity are implemented by the stock brokers based on the respective risk profile of their clients.
5.2.
Cumulative limit on value of unexecuted orders of a stock broker:
(a)
Vide SEBI circular CIR/MRD/DP/09/2012 dated March 30, 2012, stock exchanges have been directed to ensure
that the trading algorithms of the stock brokers have a ‘client level
cumulative open order value check’.
(b) In
continuation to the above, stock exchange are directed to ensure that stock
brokers 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. Stock exchanges shall ensure that such limits are effective.
5.3.
Stock exchanges shall enhance monitoring of the operating controls of the stock
brokers to ensure implementation of the checks mentioned at point 5.1(b) and
5.2(b) above; and levy deterrent penalty in case any failure is observed at the
end of stockbroker in implementing such checks.
Dynamic Price Bands (earlier
called Dummy Filters or
6. Vide
circular no. SMDRPD/Policy/Cir-37/2001 dated June 28, 2001, stock exchanges had
been advised to implement appropriate individual scrip wise price bands in
either direction, for all scrips in the compulsory
rolling settlement except for the scrips on which
derivatives products are available or scrips included
in indices on which derivatives products are available.
For scrips excluded from the requirement of price bands, stock
exchanges have implemented a mechanism of dynamic price bands (commonly known
as dummy filters or operating range) which prevents acceptance of
orders for execution that are placed beyond the price limits set by the stock
exchanges. Such dynamic price bands are relaxed by the stock exchanges as and
when a market-wide trend is observed in either direction.
6.1 It has been decided to tighten the initial price threshold of the dynamic price bands. Stock exchange shall set the dynamic price bands at 10% of the previous closing price for the following securities:
(a) Stocks on which derivatives
products are available,
(b) Stocks included in indices on
which derivatives products are available,
(c) Index futures,
(d) Stock futures.
6.2 Further, 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%. Stock exchanges shall frame suitable rules with mutual consultation for such relaxation of dynamic price bands and shall make it known to the market.
Risk
Reduction Mode
7 Stock
exchanges shall ensure that the stock brokers are mandatorily put in risk-reduction
mode when 90% of the stock broker’s collateral available for djustment against margins gets utilized on account of
trades that fall under a margin system. Such risk reduction mode shall include
the following:
(a) All
unexecuted orders shall be cancelled once stock broker breaches 90%
collateral utilization level.
(b)
Only orders with Immediate or Cancel attribute shall be permitted in
this mode.
(c) All
new orders shall be checked for sufficiency of margins.
(d) Non-margined orders shall not be accepted from the stock broker in risk reduction mode.
(e) 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% utilization level.
8 Stock
exchanges may prescribe more stringent norms based on their assessment, if
desired.
9 Stock
exchanges are directed to:
(a)
take necessary steps to put in place systems for implementation of the
circular, including necessary amendments to the relevant byelaws, rules and
regulations, within one month from the issuance of the circular and with atleast one week advance notice to the market;
(b) bring the provisions of this circular to the notice of the
stock brokers and also disseminate the same on its website;
(c) communicate to SEBI the status of implementation of the
provisions of this circular.
10 This
circular is being issued in exercise of powers conferred under Section 11 (1)
of the Securities and Exchange Board of India Act, 1992 to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities market.
Yours
faithfully,
Maninder Cheema
Deputy
General Manager
email: maninderc@sebi.gov.in
Unquote:
Trading
Members are requested to take note of the aforesaid guidelines of SEBI and act
accordingly.
M.A.V. Raju
Deputy
General Manager