Modification of stock exchange bye-laws mooted
A Securities and Exchange Board of India (Sebi) committee has recommended that the practice of issuing confirmation memos by sub-brokers to their clients should be dispensed with.
The panel, formed to look into the modifications in the bye-laws of stock exchanges, feels the practice makes trading members responsible for issuing contract notes directly to their clients.
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With an objective to bring in pointed responsibility in respect of dealings done by sub-brokers, the present system of registration of sub-brokers being done by Sebi needs to be modified and the same be brought within the jurisdiction of the respective stock exchanges.
Norms in this regard have to be specified in the regulations to ensure due implementation of this requirement, the committee has said.
The subsidiaries of the regional stock exchanges may be put under the category of trading-cum-clearing members and the category of sub-brokers of such subsidiaries be treated as subsidiary trading members.
Consequently, the subsidiary trading members may be allowed to issue contract notes to their clients.
The process of auction in respect of shortages in delivery may be done away with and in lieu provisions may be made for direct closing out at such rate and in accordance with such procedure.
Incidentally there is a specific provision in the bye-laws empowering stock exchanges with the authority to impose a penalty for failure to comply with the provisions of the listing agreement subject to a limit of Rs 5 lakh per instance of violation and an overall limit of Rs 50 lakh in a financial year.
A provision in the bye-laws for looking after and managing the surveillance and investigation functions by a separate entity through outsourcing or otherwise has to be incorporated.
The primary responsibility for the discharge of such functions shall rest on the stock exchange and where an outsourced agency is engaged to manage these functions, such agency shall be deemed to be only an agent of the stock exchange.
The committee has said that the custodians may be made responsible and liable as professional clearing members for which they have to acquire professional clearing membership of the stock exchanges.
At present there is no provision in the bye-laws of the stock exchanges making the custodians liable in case of failure to fulfill their settlement commitments.
In the draft report of the model bye-laws there is a comprehensive chapter dealing with the various aspects of risk management such as base minimum capital, additional base capital, value of securities to be maintained, among others.
The committee recognised the need to provide for an appropriate bye-law, taking into account developments of various products and segments and appreciated the need to have an integrated margining system for effective and pragmatic risk management.
Therefore, a bye-law is specifically incorporated, enabling the stock exchange to compute margin liability taking into account all the obligations, arising out of the transactions that may be executed in the capital market segment, under all segments.
Exhaustive provisions to initiate additional or special risk containment measures on the market as a whole and on specific trading members and specific securities with a view to providing greater safety and security to the settlement system have been incorporated in the model bye-laws.
Some of these include prohibitions on further dealings in any security or securities, restriction or prohibition of short selling and fixing minimum prices, restricting or prohibiting long position and fixing maximum prices, imposing different exposure limits to different sets of securities among others. A new chapter on market surveillance and investigation has been incorporated in the draft report.
The committee has recommended that a provision in the bye-laws for such functions being looked after and managed by a separate entity through outsourcing or otherwise should be incorporated.
However, irrespective of how risk management, surveillance and investigation or any other specialised function is being managed, whether by outsourcing or otherwise, the primary responsibility for the discharge of such functions shall rest wholly and squarely with the stock exchange and where an outsourced agency is engaged to manage these functions, such agency shall be deemed to be only an agent of the stock exchange.
The chapter also deals with other related matters like rumor verification and dissemination of price sensitive information to the market public.
With an objective to assist the trading members in knowing unusual trading pattern in certain scrips so as to facilitate them to exercise due diligence while dealing in such securities, it has been decided by the committee to incorporate a provision to provide for alerts in relation to the securities where there is an aberration in trading observed during the course of the day.