Association of National Exchanges Members of India
Presentation to Bombay Stock Exchange
July 30, 2014
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ANMI Representation to BSE
A. Business Development Issues
Issues Observations Suggestions
Introduction of e- KYC
It will act as comprehensive platform
for the Investors which will help them
mapping KYC documents &
requirements electronically.
The investors can open Trading
Account by submitting paper
documents in digital format in secured
way.
We suggest introducing e-KYC. Inter
alia, it will help in the following:
No Physical documents
Reduced TAT
Account Opening at Remote Locations
Secured & will have privacy
Annexure Attached- A
Workshop/Training/ Compliance/Money Launder Act Program
Majority program are done at their
regional place only.
Exchange should arrange Program at
every regional place where Majority
Members can attend the said program
at least once in a year.
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B. Compliance Issues
Issues Observations Suggestions
Trading Terminals and Approved Users
As per extant SEBI regulations, the
trading terminals can be installed only
at the broker’s head office, branch
office, sub broker or authorized
person’s office. The physical location
details of the trading terminal should
be intimated through the interface
provided by the exchanges.
It will not be feasible for the Broker to
check this compliance from a central
location as the dynamic IP address of
all such trading terminals will not allow
any central monitoring of the physical
address of such internet connected
trading terminals.
Periodic onsite audits covering 10 % of
the active sub brokers/ authorized
persons will continue as is done today
but it can never ensure 100%
assurance with this compliance
requirement which was relevant when
connectivity was based on leased
lines/ VSAT.
In the era of Internet, this requirement
may no longer be relevant or
practically feasible. Hence, we suggest
that this requirement should be done
away with.
Annexure Attached-B
Client Running Balance beyond 5 days Debit balance continuous for 5 days
(beyond T+5) is treated as temporary
margin funding.
The threshold minimum may be made
as 1 lakh per client for this requirement
- similar to client funding upload.
In case where debit is more than Rs. 1
lakh, but the collateral is more than
sufficient, then debit may be allowed.
In any case, quarterly settlement
system prevails.
Self Trade Issue wrt Multiple Pro Account Ids
The business model of many
proprietary trading brokerages is to
employ a large number of traders,
In the case of members with many traders
trading using the pro account, it is entirely
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each of whom is given a terminal and
a unique user ID as per exchange
requirements.
A large number of pro account
brokerages have deployed algo based
trading for high frequency as well as
arbitrage. These are also conducted
by traders using their trading interface
to enter parameters.
Therefore, there are a large number of
traders/user ids, all being operated
independently but under the pro code
of the broker.
possible that the trades have taken place
between these traders (user ids), though
on the exchange. However, as each of
these traders in on pro account, the trade
belongs to the same member.
We appeal BSE to take this issue with
SEBI and request them to consider the
‘User ID’ as the point of analysis for
calculating “self trades” instead of the
‘member ID’. Otherwise incidental activity
of “self trades” will be construed as unfair
trade practice.
There is an urgent need to resolve this
matter as it could lead to a virtual halt of
pro account trading by members.
C. Cost Issues
Issues Observations Suggestions
Reduction in Transaction Costs The Transaction Costs have not been
reduced for a considerable period of
time.
We request for reduction in the
transaction costs, especially in Cash
market.
High Penalties We request for reduction in the penalties.
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D. Other Issues
Issues Observations Suggestions
Arbitration Reforms Clients default at one broker and trade
at another.
Members are obliged to report the
same to the stock exchanges.
If broker trades with defaulter, it is
considered violation of code of
conduct.
Voice recording is not mandatory but it
is observed that in many cases
absence of voice recording is taken
against the member during arbitration.
In cases where clients lose at
arbitration against the broker, we
request BSE to debar such clients from
further trading with any broker, adjust
the dues if available with other broker
(details available in UCC database),
prohibit the client from directly or
indirectly trading through the
exchanges till such time the client
deposits the award money in an
escrow account. The funds may be
released or impounded based on the
verdicts obtained in the appeal forums
available to the client.
Non-production of voice recording
should not be held against the member
as member is able to furnish other
evidences.
Monthly / Quarterly Settlement of funds
and securities
Easily done by banks (3 in 1
accounts), difficult for others.
Clients do not come back.
Inconvenience to clients.
Statement at odd times.
FDR created out of client funds not
allowed.
Half yearly and Annual Option may be
introduced.
We request to waive off requirement
for quarterly settlement for amounts
below Rs. 1 lakh.
If member chooses calendar quarter
statements, then settlement statement
need not be sent.
We suggest, FDR created out of client
funds should be free from settlement
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obligations if a clear Audit Trail is
available attributable to each FDR.
PAN number compulsory Currently PAN is compulsory (except
Sikkim)
Leaves out a lot of the population like
villages (a huge roadblock for financial
inclusion).
We suggest that where a person has
AADHAR, PAN should be made
optional for such persons (subject to
declaration that client does not have
PAN at all) & subject to investment of
Rs. 2.5 lakh. The same may be
monitored by depositories using
AADHAR data.
Rectification of Trade Error beyond online
modification deadline.
Online trades moved to ERROR
account. If errors are discovered after
market close, what to do?
We advise to allow movement to
ERROR with due noting in ERROR
register, for errors discovered post-
market hours. Any movement to
ERROR account is anyway free of
penalty.
Post market errors to be reported in
Internal Audit Report and checked
during Inspection.
Such Errors to be reported to
exchange before Pay in.
Pledging of Securities as Collaterals
All the custodians charge heavily
(0.04%) for creation and removal of
pledge (mostly in terms of percentage
of volume) in addition to the charges
levied by depositories.
The trading members that are also
depository participants should be
allowed to pledge securities directly
from their own DP accounts to the
clearing corporation. Pledging
securities from TM’s own account does
NOT pose any additional threat to the
system.
Request to reduce Custodial charges
to Rs. 5 per transaction, until
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implementation of above suggestion.
Acceptance of type of Collaterals
Government bonds, FMPs, MF units,
NSE listed debentures of A-group
companies, tax free listed bonds etc.
are not allowed as collateral.
We request the Exchanges to approve
these as collateral. An early approval
of this will provide much needed
financial flexibility to members.
Fungible Collaterals
Currently, brokers are having online
facility for the transfer of FDRs from
one segment to the other segment but
not for Securities.
We advise that online facility be
provided to the brokers for the transfer
of collateral security from one segment
to the other.
Internal Audit Separate Reports for all Exchange
Segments.
We request that a common format be
worked out for reporting at all
exchanges.
Net worth Certificates We request the exchanges to develop
a uniform format for net worth
certificates. Common criteria for net
worth calculation may be used.
UCC Data Management
Every exchange & depository has its
own set of data formats and separate
rules for UCC file uploads /
modification. E.g. State & Pin codes
masters are separate for each
exchange thereby for a single
customer data has to be managed and
uploaded in 3-4 different formats which
can easily be unified.
Further, data modification is also
permitted by some exchanges and
other exchanges do not allow changes
easily or have different rules for the
same.
We request for a unified format.
We request for a set of common rules
in the interest of members.
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CTCL ID In BSE, while uploading IML id, option
should be given to member for
selection of segment - cash, F&O or
currency.
IML/CTCL report should be provided
segment wise to the members.
NISM Every three year exam is to be taken. We request that exam should be taken
only once and then it should be
automatically renewed with the said
person confirmation and binding.
Square off in case of shortfall.
Member has to inform client to square
off their position.
Incase if member wants to square off
first he has to take consent from client.
Member should be allowed to take
written consent from client for square
off position in case of shortfall, during
the time of KYC. This will help
member during market fluctuations.
Website Exchange has got BEFS, E-Boss,
Extranet, RTRMS etc.
We request for a single website
between Exchange.
System Audit
System Audit Report has been made
very complicated and lengthy.
We advise that System Audit Report
should be common and made very
easy with all exchanges.
ANNEXURE- A
E-KYC/ Green KYC
What is Green KYC ?
• Green KYC is the next generation KYC platform for managing KYC electronically.
• Green KYC management is focused on addressing the key requirements & challenges
faced by the Investors during account opening.
• Green KYC provides comprehensive platform for the Investors which will help them
mapping KYC documents & requirements electronically.
• The investors can open Trading Account by submitting paper documents in digital format
in secured way.
Advantages of Green KYC
1) No physical documents
Green KYC will useful for Investors to open trading account using electronic
copy of their proof of identity, address & income in digital format.
2) Reduced TAT
Green KYC will open doors to innovative service provision for the Investors as a
hassle free system which will reduce TAT for Account Opening Process.
3) Account opening at Remote Locations
Digital devices such as Tablet PCs, Smart Phones, or Laptops along with
limited Internet connectivity this service can be extended across PAN India even
at remote locations which will help investors to open Trading Account easily.
Security & Privacy – Green KYC
1) Green KYC is instantaneous, totally secure & this will also enhance Privacy of data of
the Investors.
2) All Proofs for account opening will be digitally Scanned by the portable devices including
the photo identity proofs & stored using digital certificates.
3) Clients will sign the KYC form using Wet Signature using portable digital equipment this
will store clients signature in digital format.
4) This Process will also act as IPV which will help in :-
Customer Validation
Audio/Video consent can be taken at the time of account opening
It will reduce frauds at great extent
5) Green KYC in collaboration with UIDAI E-KYC will play a significant role in client
authentication.
Process Flow of Green KYC :-
1) The sales person will launch the Green KYC application on his digital equipment
2) The sales person will select the documents the customer need to provide against the
required list.
3) The sales person will captures the images of the documents.
4) The sales person will ask the Investor to sign the document on the digital instrument
itself or on separate paper and the document can be uploaded
5) The Green KYC app will attach the signature to the documents & Application form.
6) The system will generate the application reference number of the Investor to tag the
KYC form in the system.
7) The application once submitted from the Sales person synchs the data back to
the central application for back office processing.
Account Opening of Green KYC :-
1) Investor will confirm his willingness to open trading account based on that sales
executive will be assigned.
2) Sales person will intimate Investor the checklist of documents required to open
Trading Account & ask him to be ready with those documents.
3) The sales person will fill up the KYC application form of the investor he will
capture the images of the documents, signature, photo of the Investor on digital
device. Ref number will be sent to the Investor through SMS & email.
4) After the Backend KYC Validations Investors trading account will be generated &
intimation will be send to customer.
ANNEXURE- B
Trading Terminals and Approved Users
Regulation: As per extant SEBI regulations, the trading terminals can be installed only at the broker’s head office, branch office, sub broker or authorized person’s office. The physical location details of the trading terminal should be intimated through the interface provided by the exchanges.
Background: Most of the trading terminals used across the country today use the Intermediate Message Layer (IML) or the Computer to Computer Link (CTCL) by which brokers can use their own trading front–end software in order to trade. Due to the expansion of the branch and franchisee network across the country the exchanges allowed brokers to set up their own network of trading terminals where the broker’s server is connected to the server of the exchange through Internet/ Leaseline / VSAT.
Details of contravention: Location of terminal at a place other than the main / branch office and the offices of the registered sub brokers/ authorized persons of the member will attract a financial penalty of Rs.50000/ - per terminal.
Connectivity:
1. Internet is, by far, the preferred mode of connectivity across most sub broker terminals because of the minimal infrastructure requirements and low costs of setting up an internet based trading terminal. Terminals which are connected on the internet have a dynamic IP address unlike a leased line or VSAT connection which has a static IP. Though Sub Brokers and Authorised persons register their address at the time of registration , use of internet data cards / wi-fi connections from alternate locations( other than their registered address) such as home or other work place, is a reality because Internet connectivity cannot be restricted to a fixed location. Leased line and VSAT connectivity is not a feasible option for sub brokers/ authorised persons as they are very expensive and require significant enhancement in office infrastructure.
2. Additionally, ISP service providers such as BSNL, MTNL, and the private ISP players etc are not willing to provide fixed IP address for so many trading terminals across the country, even at a cost. The Broker is severely constrained in setting up any central mechanism to monitor and control the log in of trading terminals from a location that can only be the registered address of the terminal reported to the Exchange.
3. It is pertinent to note that Internet based trading terminal provided directly by NSE called NOW, also does not have any control mechanism to restrict the physical location from where the trading terminal is used.
Recommendation: It will not be feasible for the Broker to check this compliance from a central location as the dynamic IP address of all such trading terminals will not allow any central monitoring of the physical address of such internet connected trading terminals. Periodic onsite audits covering 10 % of the active sub brokers/ authorized persons will continue as is done today but it can never ensure 100% assurance with this compliance requirement which was relevant when connectivity was based on leased lines/ VSAT. In the era of Internet, this
requirement may no longer be relevant or practically feasible. Hence, we recommend this requirement should be done away with.