NISM-Series-VII: Securities Operations and Risk Management - Comprehensive Study Guide

CHAPTER 1: INTRODUCTION TO THE SECURITIES MARKET

• Financial Markets Functionality:

  • Facilitate efficient transfer and allocation of financial resources from surplus providers (households, businesses, governments) to users for productive economic activity.
  • Provide aggregation of funds from a large number of investors.
  • Aggregate and disseminate relevant information for price discovery.
  • Provide liquidity and exit options for review of funding decisions.
  • Efficiency depends on maintaining attractive costs for savers to lend and users to borrow.

• Definitions of "Securities" (SCRA 1956):

  • Shares, scrips, stocks, bonds, debentures, or other marketable securities of a like nature.
  • Derivatives.
  • Units of Collective Investment Schemes (CIS).
  • Security receipts under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
  • Units of pooled investment vehicles.
  • Units issued under Mutual Fund schemes (excluding unit-linked insurance policies providing combined life risk).
  • Government Securities.
  • Electronic Gold Receipts (EGR) based on physical gold deposits.
  • Zero Coupon Zero Principal Instruments.

• Market Segments:

  • Primary Market: Used by issuers to raise capital via Initial Public Offers (IPO), Further Public Offers (FPO), Rights issues, or Private Placements. It involves direct contact between issuer and investor.
  • Secondary Market: Provides liquidity to primary market instruments. Trading occurs between two investors; the issuer is not involved. Operations occur via Over-The-Counter (OTC) or Exchange Traded Markets (Screen-Based Trading System).

• Money Market Operations:

  • Short-term market handling instruments from 1 day up to 1 year maturity.
  • Call/Notice/Term Money: pure interbank unsecured lending; Call (overnight), Notice (2–14 days), Term (15 days–1 year).
  • Market Repo: Borrowing via sale of securities with repurchase agreements. RBI regulates this market on G-Secs and corporate bonds.
  • Treasury Bills (T-bills): Zero-coupon securities issued by the Central Government maturing within a year (91, 182, 364 days).
  • Commercial Paper (CP): Unsecured short-term funds raised by corporates; issued in multiples of $Rs. 5 lakh$ with maturities of 7 days to 1 year.
  • Certificate of Deposit (CD): Unsecured negotiable instruments issued by banks (up to 1 year) or Financial Institutions (1–3 years).

• International Financial Services Centres (IFSC):

  • Caters to customers outside domestic jurisdiction and deals with cross-border finance in foreign currency.
  • The first Indian IFSC is at GIFT City, Gandhinagar, Gujarat, governed by the IFSCA (established 2020).
  • Offers tax incentives such as a 10-year income tax holiday within a 15-year block (increased to 20% within 25-years in Budget 2026).

CHAPTER 2: MARKET PARTICIPANTS IN THE SECURITIES MARKET

• Investor Categorization:

  • Retail Individual Investors (RII): Apply/bid for securities valued at not more than $Rs. 2 lakh$.
  • Institutional Investors: Includes DFIs, banks, mutual funds, insurance companies, and Foreign Portfolio Investors (FPI).
  • Category 1 FPI: Government related entities, central banks, sovereign wealth funds, pension funds, appropriately regulated entities from FATF member countries.
  • Category 2 FPI: Appropriately regulated funds not eligible as Category 1, charitable organizations, corporate bodies, family offices.
  • Accredited Investors: Class of informed investors. Individuals need Annual Income $\ge Rs. 2 Crore$ OR Net Worth $\ge Rs. 7.5 Crore$ (with $Rs. 3.75 Crore$ in financial assets) OR Annual Income $\ge Rs. 1 Crore$ + Net Worth $\ge Rs. 5 Crore$.

• Intermediaries:

  • Stock Exchanges: Provide the trading platform (e.g., BSE, NSE).
  • Clearing Corporation: Performs clearing and settlement; acts as a central counterparty through Novation.
  • Depositories: Maintain ownership records in electronic form (NSDL and CDSL).
  • Trading Members/Stock Brokers: Must be registered with SEBI to execute trades for clients or on own account.
  • Custodians: Registered entities responsible for safeguarding client securities and non-trade settlement (required net worth $Rs. 75 crores$).

• Regulators:

  • SEBI: Regulates securities and commodity derivative markets.
  • RBI: Regulates the banking sector and money market.
  • IRDAI: Regulates the insurance sector.
  • IFSCA: Unified authority for IFSC services.

• Key Regulations:

  • Prevention of Money Laundering Act (PMLA), 2002: Defines money laundering as proceeds connected to crime. Records must be maintained for 5 years.
  • SEBI (Prohibition of Insider Trading) Regulations, 2015: Prohibits trading based on Unpublished Price Sensitive Information (UPSI).
  • SEBI (PFUTP) Regulations, 2003: Investigates market manipulation and fraudulent practices like "Front Running" (buying/selling ahead of a client's order).

CHAPTER 3: INTRODUCTION TO SECURITIES BROKING OPERATIONS

• Securities Trade Life Cycle:

  1. Placing Order: Via Trader Workstation (TWS) or client channels (Phone, Internet, DMA, Algo).
  2. Risk Management: Real-time checks on quantity, value, and margins.
  3. Matching: Price-Time Priority basis conversion to trade.
  4. Confirmation: Sending Contract Notes within 24 hours of execution.
  5. Clearing and Settlement: Pay-in/Pay-out of funds and securities.

• Front Office Operations:

  • Client On-boarding: Collecting KYC forms, SARAL AOF for new individual investors, PAN details, and address proof.
  • Unique Client Code (UCC): Mandatory for every client, mapped to PAN.
  • Demat Debit and Pledge Instruction (DDPI): Replaced PoA for specific tasks like transferring securities for settlement or pledging.
  • Order Types:
    • Market Order: Execution at best available price.
    • Limit Order: Execution at a specific price or better.
    • Stop Loss Order: Triggered when price reaches a threshold to limit losses.

• Back Office Operations:

  • Settlement Cycle: All trades in India currently settle on a T+1 rolling basis. Beta version of T+0 introduced for select scripts.
  • Contract Note: Legal record of transactions; must contain statutory charges (STT, GST, Stamp Duty).
  • STT Rates:
    • Cash Delivery: $0.1$ for both purchaser and seller.
    • Future Sale: $0.02$
    • Option Sale: $0.1$ on premium.

• Security Management:

  • Bulk Deals: Disclosure required if transactions in a scrip exceed $0.5$ of total listed shares.
  • Block Deals: Minimum value $Rs. 25 crore$. Two windows: Morning (8:45 AM-9:00 AM) and Afternoon (2:05 PM-2:20 PM).

CHAPTER 4: RISK MANAGEMENT

• Margin Framework (Capital Market):

  • Value at Risk (VaR) Margin: Covers largest gain/loss on $99.9$ of days (6 sigma).
  • Extreme Loss Margin (ELM): Usually $3.5$ for stocks and $2$ for Index ETFs.
  • Mark to Market (MTM): Collected before start of next day trading.

• Liquid Assets:

  • Accepted forms: Cash, Fixed Deposits, Bank Guarantees, Govt Securities.
  • Cash Equivalent Requirement: Must be at least $50$ of total liquid assets.

• Base Minimum Capital (BMC):

  • Only Prop (no algo): $Rs. 10 Lakh$.
  • Prop + Client (no algo): $Rs. 25 Lakh$.
  • All brokers with Algo: $Rs. 50 Lakh$.

• Risk Mitigation Mechanisms:

  • Risk Reduction Mode: Invoked when $90$ collateral is utilized; unexecuted orders cancelled; only IOC orders permitted.
  • Index Circuit Breaker: Halts market at $10$, $15$, and $20$ movements.
  • Graded Surveillance Measure (GSM): Used for securities with abnormal price rise not commensurate with health.

• Core Settlement Guarantee Fund (Core SGF):

  • Fund used to fulfill obligations of defaulting members. Contributions: Clearing Corp ($\ge 50$), Stock Exchange ($\ge 25$), Clearing Member ($≤ 25$).

CHAPTER 5 & 6: CLEARING AND SETTLEMENT PROCESS

• Novation: The clearing corporation interposes itself as counterparty to every trade.
• Netting: Multilateral netting determines a single net obligation per clearing member per security/fund.
• Shortages & Auctions:
  • Fail to deliver results in a Buy-in Auction on $T+1$ day.
  • If auction fails: Close-out occurs at highest price between trade and auction day OR $20$ above closing price, whichever is higher.
• Direct Payout: Payout of securities is credited directly to the client's demat account by the CC (Timeline: $3:30 PM$ on $T+1$).
• Corporate Actions Adjustment:
  • Bonus/Split: New Price = $Old Price / Adjustment Factor$. Market Lot = $Old Lot \times Adjustment Factor$.
  • Extra-ordinary Dividend: Defined as $\ge 2$ of market value. Requires strike price adjustment in F&O.

CHAPTER 7: INVESTOR GRIEVANCES AND ARBITRATION

• SCORES: SEBI Complaints Redress System. All entities must resolve complaints within 21 days.
• Online Dispute Resolution (SMART ODR): Online platform for conciliation and arbitration.
  • Claim value $\le Rs. 1 Lakh$: Document-only arbitration.
  • Claim value $\le Rs. 30 Lakh$: Sole arbitrator.
  • Claim value > Rs. 30 Lakh: Panel of three arbitrators.
• Investor Protection Fund (IPF): Established by exchanges to pay legitimate claims of clients of defaulting members.

CHAPTER 8: OTHER SERVICES PROVIDED BY BROKERS

• IPO via ASBA: Application Supported by Blocked Amount. Retail investors up to $Rs. 5 lakh$ must use UPI.
• Portfolio Management Service (PMS):
  • Minimum net worth for applicant: $Rs. 5 crore$.
  • Min investment from client: $Rs. 50 lakh$.
  • Audit required annually.
• Margin Trading Facility (MTF):
  • Corporate brokers only (min net worth $Rs. 3 crore$).
  • Total indebtedness capped at $5 \times$ net worth.
  • Maximum exposure to a single client $\le 10$ of broker's allowable exposure.