Risk Management - Vinod PGPM Project

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HDFC Securities:

Risk ManagementRisk Management regarding working

of a broking firm, and its investors

Vinod ManghaniPGPM, IAME


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IAME HDFC Securities: Risk Management

A PROJECT REPORT

on

Risk Management regarding working of a broking firm, and its investors

at

Submitted to

International Academy of Management and Entrepreneurship, Bangalore

in partial fulfillment for the award of degree

of

Post Graduate Programme in Management (Finance)

2011 - 2013

Under supervision of:- Submitted by:-

Mrs. Sapna Nibsaiya Vinod Manghani

Faculty & Head - Corporate Relations PGPM 6th Trimester

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Acknowledgements

I express my sincere gratitude to HDFC Securities Limited and its entire staff members for givingme this wonderful opportunity to work and get to know more about the Insurance industry in general

and Endowment Plan in particular.

With deep sense of gratitude I express my indebtedness to my mentor and guide MR.BK.MURTHY

(DEAN- IAME). He has been a great source of inspiration. I thank him for his keen interest and

valuable guidance. He was also kind to discuss the problems I faced during the course of this project.

I take this opportunity to thankMr. Nitin Saluja (Senior Agency Manager) who gave me this

opportunity to do my project at this Organization. From the core of my heart, I express my sincere

thanks to Mrs. Sapna Nibsaiya (Faculty & Head-Corporate Relations), International Academy

of Management and Entrepreneurship, Bangalore for encouragement and guidance.

In last, I also want to thank my friends and other college staff who directly or indirectly helped me

in project work.

Vinod Manghani

PGPM - MIB

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Table of Contents

Sr. No. Particulars Page no.

1 Executive Summary 44

2 Company Profile 57

3 Objective of Project 88

4 Research Methodology 99

5

Data Presentation:

Introduction to capital Working of a Broking Firm Risks in a Broking Firm

1058

6Data Analysis and Interpretation

Risk Management in a Broking Firm 5976

7 Conclusion of the Study 7777

8 Suggestion & Recommendation 7879

9 Scope for Development 8080

10 Limitation 8181

11 Bibliography 8282

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CHAPTER 1-EXECUTIVE SUMMARY

A Capital Market deals in financial assets, excluding coins and currency. The financial

assets comprise of banking accounts, pension funds, provident fund, mutual fund, insurance

policy, shares, debentures, and other securities. The secondary market is the market where scrips

are traded. It is a market place, which provides liquidity to the scrips issued in the primary market.

All investments are risky, whether in stock, capital market, banking, financial sector, real estate,

bullion, gold etc. The degree of risk however varies on the basis of the features of the assets,

investments instrument, the mode of investment, time frame or the issuer of the security etc.

Risk can be defined as Possibility of suffering losses

The chance of something happening that will have an impact upon objectives. It is measured

in terms of consequences and likelihood.

Risk management in a Broking Industry is a new concept in India, since it poses maximum

risk in the financial market, managing it was felt most essential by the regulatory bodies and

exchanges.

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CHAPTER 2 - PROFILE OF THE ORGANIZATION

HDFC SECURITIES LTD.

Companys Mission

To create reputation synonymous with quality, competitiveness, fairness and

transparency dealings and be a responsible corporate citizen.

Business Objectives

The primary objective of HDFC is to enhance residential housing stock in the country

through the provision of housing finance in a systematic and professional manner, and to

promote home ownership. Another objective is to increase the flow of resources to the

housing sector by integrating the housing finance sector with the overall domestic

financial markets..

Organizational Goals

HDFCs main goals are to a) develop close relationships with individuals, b) maintain its

position as the premier housing finance institution in the country, c) transform ideas

into viable and creative solutions, d) provide consistently high returns to

shareholders, and e) to grow through diversification by leveraging off the existing

client base.

b History and background

HDFC was incorporated in 1977 with the primary objective of meeting a social need

that of promoting home ownership by providing long-term finance to households for

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their housing needs. HDFC was promoted with an initial share capital of Rs. 100

million.

HDFC Securities, a trusted financial service provider promoted by HDFC Bank and JP

Morgan Partners and their associates, is a leading stock broking company in the

country, serving a diverse customer base of institutional and retail investors.

HDFCsec.com provides investors a robust platform to trade in Equities in NSE and

BSE , and derivatives in NSE. Our website will support you with the highest

standards of service, convenience and hassle-free trading tools.

Our research team tracks the economy, industries and companies to provide you the

latest information and analysis. Our content offers financial information, analysis,

investment guidance, news & views, and is designed to meet the requirements of

everyone from a beginner to a savvy and well-informed trader. With HDFCsec.com,

you get:

Speed :

Our state-of-the art technology enables to instantly trade on the BSE and NSE.

Convenience :

You can trade with us online or on the phone from the convenience of your home or

office. Use the 3-in-1 Advantage account to seamlessly move funds and securities

across your bank, demat and trading account. This way, you do not have to issue

cheques or delivery instructions.

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Transparency :

With our trusted pedigree, you can be assured that you get the best services in a

transparent manner. By broking with us, you are in total control of your funds and

stocks.

Expertise :

Our Group has decades of experience in providing financial services to customers in a

transparent and trusted manner. We have a dedicated, motivated and experienced

team of professionals to provide you top class service.

Our Group has decades of experience in providing financial services to customers in a

transparent and trusted manner. We have a dedicated, motivated and experienced

team of professionals to provide you top class service.

Timely and Relevant Information :

We realise the importance of making information available to you as it happens.

Empowered with the latest news, developments and research, you will be able to take

informed decisions.

Your Interest :

For us, your interest comes first. We endeavour to provide high quality investment

services, in a simple, direct and cost-effective way to help you achieve your financial

goals.

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CHAPTER 3 OBJECTIVE OF THE PROJECT

Introduction to capital market.

To get familiar with the working of a broking firm.

To identify various risks involved in the broking firm.

To identify various risk for the investors of the broking firm.

To manage and reduce the identified risks.

To give your report to the branch manager with your suggestion.

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CHAPTER 4RESEARCH METHODLOGY

During my project, I collected data through various sources primary & secondary.

Primary source includes :-

1) Discussion with branch manager

2) Discussion with experts

3) Discussion with investors of the firm.

4) Live trading in the market

Secondary source includes :-

1) Various books related to stock market

2) Books related to Financial Management

3) Web sites were used as the vital information source.

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CHAPTER 5- DATA PRESENTATION

Introduction to Capital Markets

Financial System

The financial system of every economy consists of various constituents such as

1 Financial Institutions

2 Financial Companies

3 Financial Markets

4 Financial Instruments

5 Financial Services

6 Financial regulations

The financial market in India comprised of capital market and money market whereas

the financial system of the country comprised of institutions, which operate the

financial markets and the financial instruments with which the financial system is put

into operation.

Tax anomy of financial markets can be understood on functional, sectoral and

institutional basis. On a functional basis we can divide financial markets into

1 Money market (short term)

2 Capital market (long term)

The institutional classification can be made into

1 Organized financial market

2 Non-Organized financial market

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Capital Market Scenario

The stock market in India dates back to the 18th century when the East India

Company was ruling the roost in the country and was perhaps the most dominant and

powerful institution and its securities were traded. The securities trading were done in an

unorganized form at Bombay and Calcutta in early 19th century.

The decade of 90s has witnessed several changes in reformation of capital market.

Automation, transparency,. Strict surveillance, depository system, on line trading,

investors protection, new rules and regulations, etc. are some of the activities which

only reflect the growth of Indian capital market. By any reckoning Indian corporate

sector has grown very significantly in the last couple of decades whether to look at it in

terms of public and private limited companies, their share capitalization, their sales

turnover or their contribution to capital formation with this came the legislation of

SEBI to act as a regulatory body to protect investors

What is Capital Market?

A Capital Market deals in financial assets, excluding coins and currency. The

financial assets comprise of banking accounts, pension funds, provident fund, mutual

fund, insurance policy, shares, debentures, and other securities. If the stock exchanges

are well regulated and function smoothly, then it is an indication of healthy capital

market. Stock exchange provide a good leverage of the capital market and their

relationship is directly proportional. India has multi-stock exchange system with 24

stock exchanges functioning across the country. In our country, capital markets are

generally also known as security/stock market. The Indian capital market currently

provides excellent investment opportunities to domestic and foreign investors in both

equity and fixed income Segments.

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The Indian Capital Markets can be broadly classified into three types of markets.

1 Money market

2 Primary market

3 Secondary market

Money market

The money market is part of overall financial system and securities or capital market. It

deals in short term financial assets whish can be readily converted into cash. Money

market is a place for trading in money and short tern financial assets that are as liquid as

money. It provides a platform for short term surplus funds of lenders or investors and

short term requirements of borrowers, the instruments can be traded at low cost and

are highly liquid.

Primary market

Primary market is generally referred to the market of issues or market for new

mobilization of resources by the companies and the government undertakings, for new

projects as also for expansion, modernization, addition, and diversification and up

gradation. Primary market operations include new issues of shares by new and

existing companies, further and right issues to existing share holders, public offers,

and issue of debt instruments such as debentures, bonds, etc. Raising money from

capital market is cheap for the company and involves a low servicing cost. The

investors benefit by way of dividend and or capital appreciation. The following are

the market intermediaries associated with the primary market

1 Merchant banker/book building lead manager

2 Registrar and transfer agent

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3 Underwriter/broker to the issue

4 Advisor to the issue

5 Banker to the issue

6 Depository

7 Depository participant

Defects in Indian Primary Market

1 Aggressive pricing and over pricing.

2 Price rigging before and during issues.

3 Poor, wrong and vague disclosures in offer documents.

4 Poor information accessibility.

5 Misleading projections subject to vague assumptions.

6 Delay in penal actions against the erring market intermediaries.

7 SEBI not assuming any responsibility for disclosure/offer documents.

8 Bunching of issues.

9 Existence of grey or unofficial market.

10 Lack of transparency

11 Uninformed and uneducated investors.

12 Delay in listing and trading permission.

Secondary Market

The secondary market is the market where scrips are traded. It is a market place,

which provides liquidity to the scrips issued in the primary market. Thus, the growth of

secondary market is dependent upon primary market. More the number of

companies entering the primary market, the greater is the volume at the secondary

market. Trading activities in the secondary market are done through recognized stock

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exchanges, which are 24 in number including Over the Counter Exchange of India,

National Stock Exchange of India, and Inter-connected Stock Exchange of India.

Secondary market operations involves buying and selling of securities on the stock

exchange through its members. The following intermediaries are involved in the

secondary marker.

1 Broker/member of Stock Exchange- buyer broker and selling broker

2 Portfolio manager

3 Investment advisor

4 Share transfer agent

5 Depository

6 Depository participant

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WORKING OF A BROKING FIRM

Stock Broker

According to SEBI Stock Broker is a member of a recognized stock exchange(s) and is

engaged in buying, selling and dealing in securities. In other words broker is an

intermediary who arranges to buy and sell securities on behalf of clients i.e. the buyer

and the seller. A broker can deal in securities only after getting registered with

SEBI.through stock exchanges. The constitution of a broking firm may be a

Proprietary Concern, a Partnership firm or a Corporate.

COMPLIANCE DEPARTMENT

The functions carried out by Compliance Department are as follows

COMPLIANCE DEPARTMENT

Reg. of Sub-Broker Reg. Of Client Reg. Of Franchisee

Individual Non Individual

Limited Company Partnership Sole Proprietorship

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Registration of Client

Documentation required for individual client as per SEBIs guidelines are as follows

Individual

1 Client Registration Application Form.

2 Broker Client Agreement on stamp paper of value as applicable in the

respective state.

3 Identity Proof like

- Copy of Passport

- Copy of ration card

- Copy of Driving Licenses

- Copy of Voters Identity Card

- Copy of Pan card

- Letter from bank certifying account number and period from which the

same is in operation

2 Letter of Running account

Non-Individual

Limited Company

1 Client Registration Application Form.

2 Broker client Agreement on stamp paper.

3 Certified copy of Memorandum and Articles of Association.

4 Certified copy of resolution authorizing the company to open account with

HDFC SEC and appointing persons authorized to operate upon said account on

behalf of company.

5 Proof of identity in respect of authorized director

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6 Letter from the bank certifying account number and period from which the

same is in operation.

Partnership Firm

1 Application Form

2 Broker client agreement on stamp paper.

3 Partnership Deed

4 Partnership letter signed by all the partners authorizing the firm to open

account with HDFC SEC and appoint one or more partners to operate the said

account on behalf of the firm.

5 Identity Proof

6 Bank Certifying Letter

Proprietorship Concern

1 Client Registration Application Form

2 Broker Client Agreement

3 Identity Proof

4 Bank Certifying Letter

REGISTRATION OF SUB-BROKER

SEBI rules for application for registration of Sub Broker

- An application by a sub broker for the grant of a certificate shall be

made in Form B

- The Application shall be accompanied by a recommendation letter

from a stock broker of a recognized stock exchange with whom he is

to affiliated along with two references including one from his

banker

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- The application form shall be submitted to the stock exchange of

which the stock broker with whom he is affiliated as a member.

- The stock exchange on receipt of an application shall verify the

information contained and then shall also certify that the applicant is

eligible for registration.

The eligibility criteria is as follows

- The applicant should not be less than 21 years of age

- The applicant has not been convicted to any offence involving

fraud or dishonesty

- The applicant should have at least passed 12th STD

- The applicant should be fit and proper person

DEALING DEPARTMENT

Dealing department is a very important department in the broking firm as it carries

out most important activities of Buying and Selling of securities. The people

doing dealing are called as Dealers. He is the person dealing on behalf of the

investor, therefore when the investor wants to trade in some scrips he must

inform the dealer first and then the dealer deals in the market. The following are

the activities carried out in a dealing department.

DEALING DEPARTMENT

Buying Selling

Securities Securities

Entering Order Order Order

Orders Modification Cancellation Matching

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Entering Order

The trading member can enter orders in the normal market and auction market. When an

order enters the trading system it is an active order, it tries to find out on the other side

of the books if it finds the match, trade is generated. If it does not find a match, the

order becomes a passive order and goes and sits in the order book.

Order Modification

All orders can be modified in the system till the time they do not get fully traded and

only during market hours. Once an order is modified, the branch order values limit for

the branch and get adjusted automatically.

Order Cancellation

Order cancellation functionality can be performed only for orders which have not

been fully or partially traded (for the untraded part of partially traded orders only) and

only during market hours.

Order Matching

The buy and sell orders are matched on book type, symbol, series, quantity and price.

The best sell order is the order with lowest price and best buy order is the order with

highest price. The unmatched orders are queued in the system by the following

priority.

1 By Price- the buy order with the higher price gets a higher priority and

similarly a sell order with a lower price gets a higher priority.

Ex. a) 100 shares @ Rs 35 @time 9.30 am

b) 500 shares @ Rs 35.05 @time 9.43 am

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The second order price is greater than the first order price and therefore it is the best

buy order.

1 By Time- If there are one or more order at the same price the order entered

earlier gets a higher priority.

Ex. a) 200 shares @Rs 72.75 @time 9.30 am

b) 300 shares @ Rs 72.75 @time 9.33 am

Both orders have same price but they were entered in the system at different

times, the first order was entered before the second order and therefore it is the

best sell order.

TRADE

Trade is the basic activity of dealing of which a buy and sell order match with

each other. This matching of two orders is done automatically in the system.

Whenever the trade takes place the system sends a confirmation message to each of

the user involved in the trade.

Trade Modification

The user can use trade modification facility to request for modifying trade to be

done during the day. The user can request the exchange to modify price and

quantity. Since trading is done on line the dealer makes the necessary changes on

the request of the client in his trading term.

Trade Cancellation

The user can use canceling facility for canceling the trades requested. When the

request for the trade cancellation is approved by the exchange, the party to trade

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receives a system message confirming the trade cancellation at the workstation of

the dealer.

SETTLEMENT DEPARTMENT

This department performs the back office function ie settling of trades that takes

place every day. This settling is done underT+2 rolling settlement system.

NSE/BSE provides a platform for trading to its trading members; the National

Securities Clearing Corporation LTD (NSCCL) determines the funds/securities

obligation of the trading members and ensures that trading members meet their

obligations. The clearing banks and depositories provide the necessary interface

between the custodians and clearing members (who clear for the trading members or

their own transactions) for settlement of funds/securities obligation of trading

members. Their core processes

Placing Order

Decision to trade Trade execution

Funds and securities Clearing of trades

Settlement of trades

The main functions of this department are as follows

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SETTLEMENT DEPARTMENT

Pay in of Pay out of Pay in of Pay out of

Securities Securities funds funds

Pay in of Funds and Securities

The members bring in their funds/securities to the NSCCL; they make available

required securities in designated accounts with the depositories by the prescribed

pay in time. If they fail to do so the securities go for Auction.

Pay out of Funds and Securities

After due scrutiny, NSCCL sends electronic instructions to the

depositories/clearing banks to release pay out of securities/funds. This

securities/funds reach the members account respectively, if the member account is

showing a debit balance his shares are kept on hold until he clears them.

This settlement is based on rolling system

What is Rolling Settlement System?

Under Rolling settlement all the trades executed on a trading day are settled X

days later this is called T+Xrolling settlement where T is the trade date and

X is the number of business days after trade date in which settlement takes

place. The rolling settlement has started in T+5 basis in India, now it is T+2.

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Advantages

1 Under Rolling Settlement, the investors trading on the preceding or

succeeding day are treated differently. All of them wait for X days from the

trade date for settlement.

2 The gap between the trade date and the settlement is less under rolling

settlement making both securities and funds easily convertible

3 The account period settlement combines the features of cash as well as futures

market and hence distorts price discovery process. In contrast rolling

settlement segregates cash and futures market and thereby removes excessive

speculation that helps in better price discovery.

4 There is a scope for both inter-day and intra-day speculation under account

period settlement, which allow large outstanding positions and hence poses

greater settlement risks In contrast, since all open positions under rolling

settlement at the end of a date T are closed on the same day and necessarily

settled X working days later it limits the outstanding positions and reduces

settlement risks.

5 Till recently it was possible to shift position from one exchange to another

under account period as they follow different trading cycles. Rolling

Settlement took care of this making trading cycle uniform

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CENTRAL DEPOSITORY SERVICES LTD (CDSL) DEPARTMENT: -

The main activities of CDSL Department are as follows

CDSL

Account Transmission Dematerialization Settlement

Opening & Nomination & Rematerialization of trade

Just as in a bank, opening an account is the first step that an investor has to do, here

an investor intends to hold scrips in D-mat form in a depository form in the

depository system. The Investor can open an account with any DP of NSDL, CDSL.

An investor can open an account with several DPs or he may open several accounts

with a single DP in different permutation and combination as per the holding.

Why Demat Account has become a necessity?

a) SEBI has made it compulsory for trades in almost all listed scrips to be settled in

a demat mode. Although trades up to 500 shares was allowed to be settled in

physical form for some time.

b) It is safe and convenient way to hold securities compared to holding them in

physical form.

c) No stamp duty is levied on transfer of securities held in demat form.

d) It eliminates thefts, deface, delays, and subsequent misuse of the certificates

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e) Change of name, address, registration of power of attorney, deletion of

deceased name etc. can be effected across companies by one single instruction to

the DP.

f) Each share is a market lots for the purpose of transactions so no odd lot

problem.

g) Any number of securities can be transferred and delivered with one delivery

order. Therefore paperwork and signing of multiple transfer forms is done

away with.

h) It facilitates taking advances against securities on low margin and low interest.

1 Account Opening

Types of Accounts: -

The purpose fro which a depository account is opened determines the nature of

operation of such account.

Three Types Of Accounts

1 Beneficial owner account

2 Clearing member account

3 Intermediary account

Beneficial owner account

This is an account opened by investors to hold their securities in dematerialized

form with a depository and to settle the transactions of sale and purchase of such

securities in book entry form through the depository system. An account holder is

legally entitled for all rights and liabilities attached to the securities (i.e. Equity

shares, debentures, government securities etc) held in that account. Therefore the

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account is called beneficial owner account. A beneficiary account can be in the

name of an individual/corporate or broker himself for the purpose of his personal

investments in demat form. The account is opened with the DP.

Clearing members account

The entities that are authorized to pay in and receive the pay out from a clearing

corporation/clearing house against trade done by them or on behalf of their clients

are known as clearing members (CMs). All pay in and pay out transactions are

carried out through their accounts

There are two types of clearing members

1 All members of stock exchanges popularly known as Brokers are clearing

members.

2 Custodians who are permitted by the stock exchange to act as a clearing

member.

Procedure

The clearing member has to first register itself with the depository and obtain a

business partner identification number (CM-BP-ID).

The steps undertaken to open the account are same as those of individuals

difference lays in the type of form the details to be filled in and documents to be

submitted.

Checklist for a clearing member account

1 Ensure that all compulsory fields in the account opening form have been

entered (except PAN/GIR no and nomination, all other details are compulsory)

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2 Ensure that a copy of the board resolution for authorized signatories has been

enclosed in case of corporate.

3 Ensure that required letter from NSCCL giving CC-ID is enclosed. In case of

other stock exchanges this is not required.

4 Ensure CM is informed of standing instruction facility for receipts.

5 Ensure CM is informed that in case of delivery to CC instructions either of the

joint holders can sign the instructions.

6 If the forms are received at the branch of a DP, ensure that the account

opening form along with required references is dispatched to head office in the

proper and timely manner. If required retain the copy.

7 Ensure follow up with head office in case defined deadline in respect of

account opening is not met.

Intermediary account

As per SEBI regulations on stock lending and borrowing, only qualified

intermediary can lend and borrow stocks from clients. These intermediaries

borrow from lenders and lends to borrowers. Intermediaries registered with SEBI as

approved intermediary may open an intermediary account with a DP of its choice

for executing stock lending and borrowing transactions made through them. The

intermediary account may be opened only after obtaining registration from SEBI

under an approved stock lending scheme and getting the approval of

the depository for opening the account

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Transmission and Nomination

Transmission

The Companies Act 1956 distinguishes Transmission of shares from transfer of

shares. Transfer of shares relates to a voluntary act of the shareholder while

Transmission is brought about by operation of law. The word Transmission

means devolution of title to shares example- devolution by death, succession,

inheritance, bankruptcy, and marriage etc. the persons on whom the shares

devolve has to prove his entitlement by submitting appropriate documents and

seek transmission. If the securities are held in the depository system, documents

have to be submitted to the DP. If the securities are held in physical form, the

documents have to be sent to the company for effective transmission.

Check list for DPs in case of Transmission

In case if securities held jointly

1 The surviving holder(s) to have a separate account with any DP.

2 Ensure all surviving holder(s) sign instruction form

3 Ensure that instruction form is accompanied with a copy of notarized death

certificate.

4 Verify Signature

In case of securities held singly

1 Ensure legal heir(s)/representative(s)have an account with any DP

2 Ensure all legal heir(s)/ representatives sign the instruction form

3 Ensure that instruction form is accompanied with the following documents

- Copy of notarized death certificate

- Copy of notarized succession certificate

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- Certificate or order of court where deceased has not left a will, Or

- Copy of notarized probate or letter of administration

Nomination

The Companies (Amendment) Act 1999 has introduced provisions for nomination in

respect of shares, Debentures, Fixed Deposits etc. Under the provision, a Shareholder, a

Debenture holder, a Bondholder or a Deposit holder can nominate a person in whom the

shares, debentures, bonds or deposits would vest, in the event of original investors death.

Individuals applying for holding shares/debt securities on their own behalf singly or

jointly with one or two persons can make nomination. If the shares are held jointly, all

the joint holders are required to sign the nomination form. A holder can even

nominate a minor, represented by one of the parents or guardian. Trusts, Societies,

Body Corporate, Partnership Firms, Karats of Hindu Undivided Family, or Power of

Attorney holder cannot be appointed as nominee.

Dematerialization and Rematerialization

Dematerialization

It is the process in which the physical form of holding securities is replaced with

electronic (book-entry) form of holding. The securities held in dematerialized form are

fungible. They do not bear any distinguishable features like distinctive number,

certificate number. Once the shares are dematerialized they lose their identification

feature in terms of share certificate distinctive number and folio numbers. Each

security is identified in the depository system by ISIN (International Securities

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Identification number) this is a convenient method for preventing all the problems that

occur with physical securities through dematerialization.

Pre-requisites for dematerialization request

1 The registered holder of the securities should make the request

2 The request should be made in the prescribed dematerialization request

form

3 Securities to be dematerialized must be recognized by a Depository as

eligible. In other words only those securities whose ISIN has been

activated by a Depository, can be dematerialized.

4 The company/issuer should have established connectivity with any

Depository like NSDL, CDSL, Stock Holding Corporation ltd, only after

this connectivity is established that the securities of the company/issuer are

recognized to be available for dematerialization

5 The holder of securities should have a beneficiary account in the same

name as it appears on the security certificates to be dematerialized

Procedure for dematerialization

INVESTOR DP

R&T AGENT ` DEPOSITORY

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1 Client Investor submits the DRF (Demat request form) and physical

certificates to the DP. DP checks whether the securities are available for

Demat.

2 DP enters the demat request in his system to be sent to the relevant

Depository. DP dispatches the Physical certificates along with the DRF to

the R&T agent.

3 Depository records the details of the electronic request in the system and

forwards the request to the R&T agent.

4 R&T agent, on receiving the physical documents and the electronic request

verifies and checks them. Once the R&T agent is satisfied,

dematerialization of the concerned securities is electronically confirmed to

the Depository.

5 Depository credits the dematerialized securities to the beneficiary account of

the investor and intimates the DP electronically. The DP issues a

statement of transaction to the client.

Rematerialization

It is exact reverse of dematerialization. It refers to the process of issuing physical

securities in place of the securities held electronically in book entry form with a

depository. Under this process the depository account of a beneficial owner is

debited for the securities sought to be rematerialized and physical certificates for

the equivalent number of securities is/are issued.

Pre requisite to a rematerialization request

1 The beneficial owner of the securities should make the request.

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2 There should be sufficient balance of securities available in the beneficiary

account to honor the rematerialization request.

Procedure of rematerialization

1 The DP should provide rematerialization request forms (RRF) to the clients.

2 The client should complete RRF in all respects and submit it to the DP.

3 The DP should check RRF for validity, completeness and correctness. In

Particular following points should be checked

- Sufficient balance of shares available in clients account or not

- The name of the client on the RRF is exactly the same as that in the

client account

- Details like security type, face value, issuers name and lock in status

are filled in correctly

- The RRF is properly signed or not

- If the RRF is not found in order the DP should return the RRF to the

client for rectification

- If RRF is found in order the DP should accept RRF issue an

acknowledgement to the client.

Settlement of trades

One of the basic services provided by the Depository is to facilitate

transfer of securities from one account to another on the instruction of the

account holder.

Transfer of securities from one account to another may be done for any of

the following purposes: -

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1 Transfer due to a transaction done on a person-to-person basis (an off-

market trade).

2 Transfer arising out of transaction done on a stock exchange.

3 Transfer arising out of transmission and account closure.

There are four types of transactions, which a DP has to carry out

TRANSACTION

Off-Market On-Market Inter Depository Intra Depository

Off-Market Transaction

Any trade that is clear and settled without the participation of a clearing

corporation and transfer from one beneficiary account to another due to a

trade between them is called Off- Market Trade.

DEPOSITORY

DP 1 DP 2

Seller Buyer

On-Market Transaction

Any transaction for sale or purchase of securities through broker on a stock

exchange to be settled through clearing corporation/clearing house is

generally termed as On-Market Transaction.

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The procedure is as follows

a. The seller gives delivery instructions to his DP to move securities from

his account to his brokers account.

b. Securities are transferred from brokers account to CC on the basis of

the delivery out instruction.

c. On payout, securities are moved from CC to buying brokers account.

d. Buying broker gives instructions and securities move to the buyers

account.

DEPOSITORY

DP DP

CC

Broker Broker

Seller Buyer Seller Buyer

Inter Depository Transfer

Transfer of securities from an account in one depository to an account in another

depository is termed as an inter depository transfer.

Pre-requisites given by SEBI (Depository and Participants) regulations 1996

1 Both the depository must be interconnected to enable inter depository

transfers

2 Inter Depository Transfer can be done only for securities that are available

for dematerialization on both the depositories.

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3 The account in Depository can be either a clearing account or a beneficiary

account.

4 For debiting the clearing account on the beneficiary account with

Depository the form for the inter depository delivery instruction is required to

be submitted by the clearing member/beneficial owner to DP.

RISK MANAGEMENT DEPARTMENT

The concept of Risk Department on a broking firm is a new concept in India. The

Risk Management Department is principally concerned with the management of

trading and non-trading risks. It seeks to ensure that all risks, which threaten the

business, are recognized, controlled, and reduced to their feasible economic

minimum and not just the risks that are capable of being insured. There have been

experiments with different risk containment measures in the recent past, following

are some of the measures which are taken by the broking firms.

RISK DEPARTMENT

Capital On Line Off-Line Margin Circuit

Adequacy monitoring monitoring requirement filters

1 Capital Adequacy Requirement

Every stock exchange has mentioned its own capital requirements, as

compared to the minimum statutory requirements as also those stipulated by

other stock exchanges; the Capital adequacy requirements stipulated by NSE

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are higher. Out of total capital provided by a member, Base Minimum Capital

(BMC) is utilized towards taking exposure/turnover only and Additional Base

Capital (ABC) is utilized towards margin payment if not used up for taking

exposure/turnover.

2 On-Line and Off-Line Exposure Monitoring

NSCCL has put in place an online monitoring and surveillance system

whereby exposure of the members is monitored on a real time basis.

Off-Line surveillance activity Consists of inspection and investigations as per

regulatory requirement a minimum of 10% of the active trading members are to

be inspected every year to verify the level of compliance with various rules, bye

laws and regulations of the exchange.

3 Margin Requirement

The daily margin in rolling settlement comprises of Mark to Market margin

(MTM) and Value at Risk based Margin (VaR). Margins are computed at

client level. A member entering an order needs to enter the client code. Based

on this information margin is computed at the client level which will be

payable by the trading member on T+1 basis.

4 Index based Circuit Filters

An index based market wide circuit breakers system applies at three stages of

the index movement either way at 10%, 15%, and 20%. These circuit breakers

bring about a coordinated trading halt in all equity derivatives market

nationwide.

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RISK

Whether it is driving, or just walking down the street, everyone exposes himself to

risk. It is equally true in the case of investments. Your personality and lifestyle play a

big role on how much risk you are comfortably able to take if you invest in stocks and

have no trouble sleeping at nights because of your investments you are probably

taking too much of risk. All investments are risky, whether in stock, capital market,

banking, financial sector, real estate, bullion, gold etc. The degree of risk however

varies on the basis of the features of the assets, investments instrument, the mode of

investment, time frame or the issuer of the security etc.

Risk can be defined as Possibility of suffering losses

The chance of something happening that will have an impact upon objectives. It is

measured in terms of consequences and likelihood.

Investopedia has defined risk as The chance that an investments actual return will be

different than expected this includes the possibility of losing some or all of the original

investments.

When considering any security, the investor is always concerned with the return

expected on the investments and the risks of the investments, i.e. how likely it is that

the return expected will be achieved. There are two types of risks

1 Systematic Risks

2 Unsystematic Risks

Systematic Risks

The risks arising out of external and uncontrollable factors, arising out of the

market, nature of industry, the state of the economy and a host of other factors.

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This risk influences a large number of assets. It is virtually impossible to protect

yourself against this type of risk. Example, Market Risk, Interest rate risk,

Purchasing power risk etc.

Unsystematic Risk

The risk emerging out of known and controllable factors, internal to the issuer of

the securities or companies. This risk affects a very small number of assets.

Sometimes referred to as specific risks. Example Business risk, financial risk,

Insolvency risks etc.

RISK CATEGORIES

Dynamic Static Pure Speculative

DynamicAssociated with changes in the economy

StaticWith or without changes in the economy

PureChance of loss or no loss

SpeculativeChance of loss or gain

Risk and Uncertainty

Risk and uncertainty go together. Risks suggests that the decision maker knows

that there is some possible consequence in an investment decision, but uncertainty

involves a situation, where the outcome is not known to the decision maker. But

basically, whether the outcome is known or not, the investments involve both risk

and uncertainty. For our decision, the word Risk is comprises of all elements of

variability of return, uncertainty of the outcome, etc.

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The investors and some issuers of securities can control some risks by

planning. Others cannot control and they have to bear the consequence

compulsorily.

What Causes .the Risks?

These risks are caused by the following factors

1 Wrong decision of what to invest in.

2 Wrong time of investments.

3 Nature of investments.

4 Creditworthiness of the issuer.

5 Maturity period or the length of the instrument.

6 Method of investments, namely, secured by collateral or not.

7 Terms of lending such as periodicity of servicing, redemption period, etc.

8 Nature of industry in which the company is operating.

9 Amount of investment.

10 National and International factors, acts of God.

Ways to deal with Risks

Dealing Risks

Avoid it Retain it Reduce it Transfer it Share it

1 Avoid it

Investor should take those risks, which are bearable. Unnecessary and

excessive risks should be avoided.

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2 Retain it

Every Investment posses some inherent risks which are unavoidable; in order

to earn certain returns investor has to retain certain risks.

3 Reduce it

Investor can reduce the risk by taking advice from a knowledgeable persons,

analysts etc before investing in any instruments.

4 Transfer it

Insurance policies are the best way to transfer any risk.

5 Share it

While investing an investor can approach his friends, relatives etc to invest

with him and the risk gets shared among different people.

Rules of risk to be remembered

1 Dont risk more than you can afford to lose

2 Consider the odds

3 Dont risk a lot for a little

Risk and Return

Every investor invests money to receive returns. The risk/return tradeoff could

easily be called the iron stomach test. Deciding what amount of risk you can take

on while allowing you to get rest at night is an investors most important decision.

The risk/return tradeoff is the balance, an investor must decide on between the desires

for the lowest possible risk for the highest possible returns. Remember to keep in

mind that low levels of uncertainty (low risks) are associated with low potential

return and high levels of uncertainty (high risks) are associated with high

potential returns. Therefore risks and return go hand in hand.

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RISK/ RETURN TRADEOFF

R Low Risk Higher Risk

Low Return High Return

S.D (or Risk)

The Risk Return relationship between various Investments Instruments is as

follows

R * Equity

E * Mutual Funds

W * Debentures

A * Fixed Deposits

R * Post Office Certificates

D * Bank Deposits

S * Insurance Schemes

Risk Taken By Investor

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INVESTORS RISKS

Smart investors know how much risk is appropriate for them, and they don't exceed

that level. They realize that risks come in many forms, and there is no way to totally

escape from them whatever measure or precautions they may take.

If you can recognize risks, you can manage them with relatively simple solutions. But

too many investors underestimate the importance of doing this and it's one of the most

important tasks investors should do.

The following are some risks which the investors face.

Inflation risk.

This is the risk that money you save or earn will lose some of its purchasing power.

Even if your five-year certificate of deposit is guaranteed, the dollars you get back

may not buy as much in five years as they bought when you took them to the bank.

It may make you feel giddy to receive double-digit interest on your money market

fund, as some investors did in the early 1980s. But if inflation is also in double digits,

as it was back then, you're more likely to fall behind economically than get ahead

From 1970 through 1999, the cost of living in the United States rose at a compound

rate of 5.1 percent a year. Many people believed they would be secured if they could

retire on a fixed income of $50,000 a year, which in many cases is adequate today.

But at the rate of 5.1 percent inflation, after 25 years you will need $173,400 to buy

what you can get today for $50,000. Even if inflation is much more modest, say 3

percent, a person who retires on $50,000 today at age 55 will require $104,700 at age

80 to buy what $50,000 buys today.

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Stated another way, with inflation of 3 percent over 25 years, your $50,000 will be

worth only about $23,300 in today's dollars. At inflation of 5.1 percent, it will be

worth only $13,500.

You may think these numbers are far-fetched and have a hard time relating to them.

But it was amazing to learn that in King County, Washington, per-capita income rose

from $4,834 in 1969 to $40,904 in 1998.

To illustrate how money has lost its purchasing power during last 10 to 15 years, in

India a two wheeler which costed Rs 5000 few years back is available today in the

range of Rs 35000 to 60000.Our most popular car Maruti which was priced Rs 50000

initially when it was introduced in the market today costs Rs 2.5 lacs.

The way to protect yourself against this risk is to own at least some equity assets. For

most investors, that means stock funds. Over the past 75 years, the annual inflation-

adjusted return of the Standard & Poor's 500 Index was 8 percent, for small-cap

stocks it was 9 percent, while it was only 0.7 percent for Treasury bills and 1.5

percent for government bonds.

Most investors ought to have at least 10 percent of their portfolios in assets that can

increase in value, such as stock funds. Studies show that even a 10 percent equity

stake can noticeably increase the returns while at the same time it actually reduces the

risk of an all-fixed-income portfolio.

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Business risk.

This is the risk that you buy stock in a company that fails or has a major unexpected

deterioration in its business. The cure for this risk is basic and simple: diversification. If

you own stock in one or a handful of companies, an unexpected disaster hitting one of

them can do serious damage to your portfolio. But if you own 100 companies, a

disaster in one will have little overall effect.

Credit risk.

This is the variation of business risk that affects bond investors. You can buy a bond

issued by a company that can't pay the interest or the principal. It's called a default.

More commonly, the company that issued your bond has an unexpected deterioration in

its business, and its bonds are downgraded by rating services. When this happens, the

market value of the bond falls.

The cure for credit risk is mostly diversification. If you own a single bond and it

winds up being insolvent, you may be in a heap of trouble. But if you own 20 bonds,

as is typical of some bond funds, one or two duds won't spoil your party.

Manager risk

Once you determine the proper amount of your portfolio that should be in stocks, you

typically hire a manager to pick them for you. Or you buy a mutual fund, which

amounts to the same thing. Youll probably pick a manager with a winning

personality, persuasive marketing materials and a track record that's impressive.

Theres just one problem: Very, very few people have been able to successfully pick

market-beating stocks over long periods of time, and even the best track records don't

last forever. By now you might be able to guess the recommended way to overcome

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this risk: by practicing the most fundamental investing technique of all,

diversification.

Invest in index funds that in turn invest in hundreds or even thousands of stocks. If

you prefer actively managed funds, split your investments among multiple managers. If

you're investing in an actively managed large-cap value fund, choose two of them, run

by different managers. Some mutual funds give you a way to do this in a single

package. Birla Mutual Fund for example, has several funds, which invest in different

sectors of industry and are managed by carefully chosen managers of proven record.

It's a way to get the benefit of several fund managers and diversification.

Market risk.

This is the chance that the entire market, either bonds or stocks, goes way up when

you want to buy-or way down when you want to sell. The market is the product of

nearly countless influences and forces, both economic and psychological, both

rational and irrational. In the very long term, it's a relatively safe bet that the market

will continue its upward climb. But nobody can consistently and accurately predict

what the market will do in a week, a month, a year or even a decade.

Over the past century, the U.S. stock market measured by the Dow ]ones Industrial

Average has experienced 19 bear markets in which the index declined more than 20

percent. These figures, by the way, represent bear markets for the highest quality

companies. If you think this is all in the past, remember that the NASDAQ 100 Index

suffered a decline of more than 50 percent last year. And Warren Buffet's Berkshire

Hathaway, a portfolio managed by one of the best in the business,

Dropped 50 percent from March 1999 to March 2000.

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If you're an equity investor, you have two ways to protect yourself from bear markets.

First, you can use mechanical market timing, to attempt to get out of stocks before

they experience major losses and to attempt to get back in before they experience

major gains., this can be a frustrating and imperfect process. But at times it is very

successful. Second, you can have enough fixed-income assets in your portfolio to

dampen the volatility of equities, so your temporary losses won't exceed your risk

tolerance. Most investors should have at least 10 percent of their portfolios in variable

assets like equity funds, most should have at least 10 percent of their assets in fixed-

income investments like bond funds to dampen the volatility of their portfolios.

Bond investors, including those who invest through bond funds, can protect

themselves by the use of market timing and by investing in short-term bonds, which

are less volatile than bonds with longer maturities.

One form of market risk is paying too much for assets when you invest in them. By

using dollar cost averaging, the practice of routinely investing a fixed amount in an

asset every month or every quarter or every year, you automatically buy more units

when prices are down and fewer when prices are up. Over time, this technique will

make your average price per share of a mutual fund lower than the average of all the

prices at which you bought. This is the technique many investors use when they invest a

fixed amount every month to buy units of mutual fund.

Tax risk.

This is the risk, usually a certainty, that your investment gains will be diminished by

income taxes. Later this year, all mutual fund prospectuses will have to disclose more

fully the theoretical impact of taxes on their returns. This will make returns look

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smaller, because the Securities & Exchange Board of India has ordered that

prospectuses and advertisements must mention the impact of tax clearly.

There are plenty of ways to protect you against tax risk, but some of them come at the

expense of good investing principles. Many people bought limited partnerships in the

early 1980s, having been promised substantial tax write-offs from big expected losses.

Then something unexpected happened: Government changed the tax laws

subsequently. The investment losses came as expected, but the tax write-offs

disappeared, as the changed law did not allow this. Without tax breaks, many limited

partnerships didn't have well enough fundamentals to attract any new buyers hence the

investments became duds.

Here are a few of the ways you can save taxes on your investments. Each of them

works, but each has drawbacks that you should understand in advance.

Buy and hold. If you don't sell, you won't be hit with a capital gain.

Invest in mutual funds with tax benefits. There are many funds available in the

market, which allow this. The dividend earned on these investments is also

tax-free.

if you're in a high tax bracket, invest in RBI tax-free bonds instead of taxable

bond funds and taxable money-market funds.

if you have exhausted all other avenues and still need to reduce taxes, consider

variable annuities.

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Expense risk.

This is the risk that your investment returns will be eroded by paying needlessly high

expenses. Expenses are like anchors being dragged behind a sailboat. They may be

invisible, but they inevitably reduce the speed of the boat. High expenses take many

forms, including sales commissions (called loads in mutual funds) and ongoing

expense ratios.

Every investment manager expects and deserves to be paid. But some investment

companies and products charge investors too much. Than you should have a very

good reason.

The best way to control this risk is to inquire about expenses before you invest. Every

investment product involves expenses; don't invest in one until you understand this

element. Here are a few specific suggestions:

When you buy mutual funds, buy no-load funds. This will save you from one of

the biggest one-time losses your investment can experience.

If you're a buy-and-hold investor, invest in index funds for their ultra low

expenses.

If you invest in stocks or bonds, choose a reputed brokerage house who

charges a reasonable brokerage. SEBI has these days made it mandatory for

brokers to issue split Contract Notes, which separately give the rate at which

the broker has bought the stock for you and brokerage he has charged you.

Event risk

This is the -risk that some unexpected event will topple the market, or part of it. This

may be an assassination, a natural disaster, a political upheaval or some man-made

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crisis that causes investors to suddenly question the future. This risk also can be very

personal, affecting only you and your family: a death, illness, layoff or a house fire.

Unless you keep all your money in government-guaranteed bank accounts, there is no

absolute protection against sudden events. Your best protection may be the right

attitude, that life is uncertain and the uncertainty is part of what makes it worth living,

backed up by an emergency fund that would let you continue living if your income

were interrupted or if your expenses suddenly skyrocketed.

Liquidity risk

This is the risk that you won't be able to get your money quickly when you need it

without taking a significant investment hit. If you own a small business, selling it for

anything close to what you think it's worth is usually difficult and time consuming. If

your wealth is tied up in raw land and you need to turn it into cash, you may have to

wait months or years to get the price you think you deserve. If you invest in limited

partnerships and need to sell before they expire, you may have to sell at a substantial

loss.

You protect yourself against this risk in two ways: First, by making sure that most of

your investments are in liquid assets that can be sold quickly and inexpensively;

stocks, bonds and mutual funds, gold all qualify. Second, by having an emergency

fund that will let you quickly get your hands on money when you need it, without

having to sell an investment you had planned to keep.

Fraud risk.

This is the risk that you'll simply be defrauded in your investments. This is different

from making a dumb mistake. Fraud deliberately creates victims. To keep yourself

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from becoming one of them, deal with reputable investment professionals. Don't make

impulsive decisions about unfamiliar investments; instead, take the time to have

somebody thoroughly check out anything you are considering to buy.

If you're told you must make a decision immediately to take advantage of a

opportunity, there is only one right answer: "I'll pass." If you are offered something

promising an unusually high return, remember that risks and returns always go

together. If you can't identify the risks you are taking in order to seek a high return,

leave your checkbook in the drawer where it belongs.

Finally, follow one of the most basic of all investment rules: Don't invest in

something you don't understand.

Emotional risk.

This is the risk that your emotions will get out of hand and start dictating your

decisions. Greed and fear are the two biggest forces driving our Stock Markets, and

nobody is totally immune to them. Another form of emotional risk is grandiosity,

thinking you know more than you really do and becoming overconfident in your

ability to see into the future.

We sometimes see emotional risk most clearly when investors who are on the

sidelines see others making big gains, and eventually they get so anxious to get some of

those gains for themselves that they just jump into whatever is "hot" in the market. We

call this the "I can't stand it any more" market timing system, and very often it leads

people to buy at close to the peak of a market cycle. We see the converse of this when

investors get increasingly frustrated and exasperated- at-continuing losses, and finally

they "Can't stand it any more" and sell, often at close-of -the bottom of a

market cycle.

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If investors could follow the old Stock Market saying, "Buy low and sell high," they

would make money. But in both instances, the "I can't stand it anymore" timing

system leads them to do the opposite.

To protect yourself from the risk of grandiosity, be brutally honest about the results of

the investments you have made. Keep a list, if necessary, of the decisions you made

that went wrong. Next time you are sure that you know better than the rest of the

market, pull out the list and study it.

The best protection against emotional risk is a disciplined plan for buying and selling.

Make sure your assets are balanced so you can sleep at night no matter what the

market is doing. If you use market timing, follow a strict discipline, preferably having

somebody else implement it for you - somebody without any emotional charge on

each trade. If you are a buy-and-hold investor, make sure you have enough fixed

income in the portfolio to moderate the volatility of equities; and make sure you have

some equities in the portfolio so you won't feel totally left out during bull markets.

Finally, the biggest risk of all: You could run out of money before you run out of

life.

This is the biggest fear of many retirees, that their resources won't last long enough to

support them for life.

There are several good ways to protect you against this risk, but none is foolproof.

You must protect yourself against inflation, which we already discussed briefly. You

must keep your living costs within reasonable bounds. You must start with enough

assets before you stop working. Every year "early" that you retire can impact you

financially in two ways: It gives you one less year of savings and one more year of

future life. Finally, you must invest your assets in a sensible way so your risks are

limited and you have some opportunity for growth.

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RISKS INVOLVED IN A BROKING FIRM i.e. FOR BROKER

The Exchange has been exposed to a large number of risks, which have been

inherently borne by the member brokers for all the times. These risks are as follows

BROKER

Operational Financial Market Credit Liquidity

Risks Risks Risks Risks Risks

Operational Risks

Operational risks are very common risks, which are found in every organization.

Operational risks can be defined as Risk of loss arising due to procedure errors,

omission or failure of internal control system. Every individual organization faces the

risks that their activities and processes may be disrupted unexpectedly or fail to meet

expected performance level. Strong risk management is an essential part of good

corporate governance and something that helps to protect the shareholders value.

There is also growing recognition of the need to ensure that an effective framework of

management controls and supervision is in place. This view is reflected in the

attention that is being placed on risk management by regulators and testing authorities

around the world.

Management at an operational level often forces on the smooth and efficient

running of an organization Attention is not always given to management of

operational risks within the context of an enterprise-wide view of risks. Therefore the

organization has to face the following risks

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1 Direct financial losses, which arise from failing to meet an obligation (ex

penalty interest payments or restitution loss).

2 Direct financial losses, attributable to an absence of income (ex, from loss of

sales, transaction fees, direct fees or commission)

3 Statutory or regulatory penalties resulting to revocation of licenses.

4 Opportunity costs, arising from adverse publicity, being unable to trade or

because of processing delays, backlogs, and poor customer service

delivery or poor product or service quality.

The errors and failures causing risks

Risk category Functional Responsibilities Examples

PEOPLE

TECHNOLOGY

REGULATORY

Business line

Human recourses

Security

Business line technologies

Central infrastructure

Data center maintenance

Compliance

Finance and accounting

Legal

Human errors

Internal fraud

Staff shortage/sabotage

Technology failure

Outmoded system

Poor data integrity

Regulator disputes

Misstatingaccounts

Litigations

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The operational risks found in a broking firm at various departments are as

follows

OPERATIONAL RISKS

Compliance dept Dealing dept Settlement dept CDSL dept

COMPLAINCE DEPARTMENT RISKS

In compliance department risks is involved in absence of documents

1 Absence of application form

2 Absence of different agreements and signs on agreement

3 Absence of bank certification

4 Absence of identity proof

5 Absence of reference letter from chartered accountant

6 Absence of undertaking from sub broker that he/she has not been involved

in any criminal offence and no trail is pending against him/her.

7 Absence of authorization letter for maintaining account on running basis

8 Risk is involved if the client is not introduced by someone

EFFECTS

If the compliance department doesnt complete all the required documentation the

results could devastating. First of all in the absence of compliance the broker can

be suspended and penalized. This would result in bad publicity, loss of business

and credibility, because no one would like to be associated with a suspended

broker. Secondly when compliance is done the broker is insulated from a probable

risk, fraud, and cheating and financial loss at the entry level itself. Proper

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introduction, reference from a chartered accountant, bank statement ensures that

the investor is genuine and has no malafide intentions. It wouldnt be out of place

that many brokers were cheated by some investors by giving false information and

third party cheques. Since the compliance department had not done their work

perfectly the brokers were on a very weak wicket when they sought legal redressal

of their problems. Similarly the information about the sub broker that he is not

involved in any criminal offence and no trial is pending against him saves the

broker from any future risk and liability.

DEALING DEPARTMENT RISKS

1 Placing of wrong order i.e. instead of buy order sell order is given.

2 Placing of wrong quantity.

3 Trading done from wrong account i.e. buying and selling for wrong clients

account.

4 Trading in wrong scrip ex instead of trading in reliance, trading is done in

infosys.

5 Entry not made in trade book.

EFFECTS

In all the above-mentioned points the broker suffers financial loss. When instead of

buying the sell order is punched the broker is unable to give delivery of shares

resulting in Auction of the shares and loss to him. It is also observed that in some

volatile scrips if the investor misses an opportunity he pressurizes the broker to

compensate him. If this is repeated quite often the investor loses confidence and

prefers changing the broker. Thus long-term relationships are lost leading to

financial losses.

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SETTLEMENT DEPARTMENT RISKS

1 Payout of shares to wrong account

2 Failure in deciding brokerage slab for a client

3 Pay in not done by the client

4 Wrong preparation of statement of funds

5 Failure in sending confirmation of account opening to the client.

6 Failure in sending contracts.

7 Failure in preparing bills.

8 Failure in preparing pay in and pay out of slips.

9 Frauds by the employees.

EFFECTS

Though no department is less important in a broking house, without hesitation it

can be said that the work of settlement department is of utmost responsibility. All

the good work done by different departments can be nullified by an incompetent or

casual settlement department. Wrong payout of shares, wrong payout of funds,

failure in preparing bills in time, failure in preparing pay in and pay out of slips

can not only create chaos in a broking firm, it can result in huge financial losses to

the broker. It is on the record that frauds by the employees have been responsible

for many brokers to go bankrupt and close their business.

RISK DEPARTMENT

1 Failure in giving limits.

2 Giving wrong limits to the client.

3 Failure in collecting margins.

4 Failure in sending daily reports to Franchisee and sub broker.

5 Failure in sending daily reports to management.

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EFFECTS

Like settlement department the role of risk department is very important. This

concept is quite new in India and its needs were felt when during last two three

years broking houses suffered huge losses. However the risk department, which is

supposed to be managing risk, is managed by human beings and itself faces many

risks. If it does not give enough limits where it is due and is required it can result in

loss to investor or a sub broker leading to dispute and financial loss. On the

contrary giving wrong limits have the same effect. Failure in collecting margins

attracts two types of risks regulatory and financial. If the margins are not collected

according to SEBI guidelines it can result in suspension, termination or financial

penalty to a broking firm. And insufficient collection of margins exposes a broker to

financial loss in case of default.

CDSL DEPARTMENT RISKS

1 Time period for pay in of shares which is not followed

2 Punching error

3 Networking problem with the exchange.

4 Failure in maintaining records for D-mat and R-mat account

OTHER RISKS

Market Risk

The risk of loss arising from adverse market rate movements e.g. foreign

exchange (transaction, translation, or economic) interest rates, commodity and

equity prices are termed as market risk. Generally this risk occurs due to volatility

in scrips, which cant be controlled.

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Credit risk

It is the risk that the counter party of financial transaction will fail to perform

according to the terms and conditions of the contract, thus causing the other party to

suffer a financial loss. Credit risk is often due to bankruptcy or insolvency of the

counter party.

Liquidity Risk

Market liquidity is the risk that a financial instrument cannot be sold quickly at a

price, which equates to their market value. Liquidity changes over time and rapid

changes occur in highly volatile conditions. Derivative instruments, which are

new, and the liquidity of the market have yet to be fully tested. It must be

recognized that many derivatives are OTC based and liquidity of these products

can disappear quickly.

Financial Risk

Financial risk means fear of loss of money, which is the biggest risk faced by a

broking firm. Financial risk in respect of broking firm can be of two types firstly

loss of income i.e. brokerage secondly loss of capital.

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CHAPTER 6- DATA ANALYSIS & INTERPRETATION

RISK MANAGEMENT

Risk is defined as possibility of suffering losses

This risk in itself is not bad, risk is essential to progress, and failure is often key part

of learning, but we must learn to balance the possible negative consequences of risk

against the potential benefits of its associated opportunities. This is risk management.

Principles of Risk management are as follows

1 Global Perspective

- Viewing development within the context of large level developments

- Recognizing both the potential value of opportunity and the potential

impact of adverse effects

2 Forward looking view

- Thinking towards tomorrow, identifying uncertainties, anticipating

potential outcomes

- Managing project resources and activities while anticipating

uncertainties

3 Open Communication

- Encouraging free-flowing information at and between all project levels

- Enabling formal, informal, and proper communication

- Using processes that value the individual voice (bringing unique

knowledge and insight to identifying and managing risk)

4 Integrated management

- Making risk management an integral and vital part of project

management

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- Adapting risk management methods and tools to a projects

infrastructure and culture

5 Continuous process

- Sustaining constant vigilance

- Identifying and managing risks routinely through all phases of the

projects lifecycle

6 Shared product vision

- Mutual product vision based on common purpose, shared ownership,

and collective communication

- Focusing on results

7 Teamwork

- Working cooperatively to achieve common goal

- Pooling talents, skills, and knowledge

Functions of Risk Management are as follows

i. Identify - Search for and locate risks before they become

problems

ii. Analyze - Transform risks data into decision-making

information. Evaluate impact, probability, and time frame,

classify risks, and prioritize them

iii. Plan - Translate risk information into decision and mitigating

actions (both present and future) and implement those actions

iv. Track - Monitor risk indicators and mitigation actions

v. Control - Correct for deviations from the risk mitigation plan.

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vi. Communicate - Provide information and feedback internal and

external to the project on the risk activities, current risks, and

emerging risks.

RISK MANAGEMENT IN A BROKING FIRM

Risk management in a Broking Industry is a new concept in India, since it

poses maximum risk in the financial market, managing it was felt most essential by

the regulatory bodies and exchanges. Therefore NSE introduced for the first time in

India, risk containment measures that were common internationally but were absent

from the Indian Securities Market. NSCCL has put in place a comprehensive risk

management system, which is constantly upgraded to pre-empt market failures. These

measures were taken to reduce the brokers risks. Whereas SEBI has given some

guidelines under Investors Protection to protect investors risks.

NSE has given the following risk management measures

Margins

NSE has specified Different margins for different instruments like stocks futures and

options etc. Margins depend upon the volatility and market conditions, It vary from

stock to stock and instrument to instrument

Categorization of stocks for imposition of margins

Daily margins payable by members consists of the following:

1. Value at Risk Margins

2. Mark to Market Margins

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Daily margin, comprising of the sum of VaR margin and mark to market margin is

payable.

Value at Risk Margin

VaR margin is applicable for all securities in rolling settlement. All securities are

classified into three groups for the purpose of VaR margin.

The VaR based margin would be rounded off to the next higher integer (For E.g.: if

the VaR based Margin rate is 10. 0 1, it would be rounded off to 11. 00) and capped at

100%.

The VaR margin rate computed as mentioned above will be charged on the net

outstanding position (buy value-sell value) of the respective clients on the respective

securities across all open settlements. The net position at a client level for a member

are arrived at and thereafter, it is grossed across all the clients for a member to

compute gross exposure for margin calculation.

For example, in case of a member, if client A has a buy position of 1000 in a security

and client B has a sell position of 1000 in the same security, the net position of the

member in the security would be taken as 2000. The buy position of client A and sell

position of client B in the same security would not be netted. It would be summed up to

arrive at the member's exposure for the purpose of margin calculation.

VaR margin rate & Security category

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Mark-to-Market Margin

Mark to market margin is computed on the basis of mark to market loss of a member.

Mark to market loss is the notional loss which the member would incur in case the

cumulative net outstanding position of the member in all securities, at the end of the

relevant day were closed out at the closing price of the securities as announced at the

end of the day by the NSE. Mark to market margin is calculated by marking each

transaction in scrip to the closing price of the scrip at the end of trading. In case the

security has not been traded on a particular day, the latest available closing price at

the NSE is considered as the closing price.

In the event of the net outstanding position of a member in any security being nil, the

difference between the buy and sell values would be considered as notional loss for

the purpose of calculating the mark to market margin payable.

MTM profit/loss across different securities within the same settlement is set off to

determine the MTM loss for a settlement. Such MTM losses for settlements are

computed at client level.

Upfront margins collection

Members are required to ensure collection of upfront margin from their clients at rates

mentioned below and deposit the same in a separate clients account, in respect

Risk Management - Vinod PGPM Project

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