PROJECT REPORT ON
“Risk Management regarding working of a broking firm, and its investors”
Khavale Ajay Ganesh
UNDER THE GUIDANCE OF
PROF. MAHESH HALALE
UNIVERSITY OF PUNE
IN PARTIAL FULFILMENT OF THE REQUIREMENT FOR
THE AWARD OF DEGREE OF MASTER OF BUSINESS
It’s a great privilege that I have done my project in such a well-organized and
diversified organization. I am great full to all those who helped and supported me in
completing the project.
First of all I would sincerely like to thank Mr. Rohit Rakibe (Branch Manager,
Nasik), for his valuable guidance and kind co-operation during the project. I am
highly grateful to Mr. Dhirendra Kapadi (Associates of HDFC SEC) for the help
provided by them in various forms.
I am also thankful to our director Dr. Sharad Joshi and my project guide Prof.
Mahesh Halale for helping me in completing the project.
Last but not least, I am also thankful to all college staff and my friends for helping me
directly or indirectly in my project.
CHAPTER 1-EXECUTIVE SUMMARY
Sr.No. Topic Page No.
1 Executive summary 1-1
2 Company Profile 2-4
3 Objective of Project 5-5
4 Research Methodology 6-6
Introduction to capital
Working of a Broking Firm
Risks in a Broking Firm
Data Analysis & Interpretation
Risk Management in a Broking Firm
7 Conclusion of the study 74-74
8 Suggestion & Recommendation 75-76
9 Scope for development 77-77
10 Limitation 78-78
11 Bibliography 79-79
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.
CHAPTER 2 - PROFILE OF THE ORGANIZATION
HDFC SECURITIES LTD.
“To create reputation synonymous with quality, competitiveness, fairness and
transparency dealings and be a responsible corporate citizen”.
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
HDFC’s 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
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
their housing needs. HDFC was promoted with an initial share capital of Rs. 100
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,
Our state-of-the art technology enables to instantly trade on the BSE and NSE.
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.
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
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
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
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.
CHAPTER 4– RESEARCH 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.
CHAPTER 5- DATA PRESENTATION
Introduction to Capital Markets
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
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
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
The decade of 90’s 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.
The Indian Capital Markets can be broadly classified into three types of markets.
1 Money market
2 Primary market
3 Secondary 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 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
3 Underwriter/broker to the issue
4 Advisor to the issue
5 Banker to the issue
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.
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
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
1 Broker/member of Stock Exchange- buyer broker and selling broker
2 Portfolio manager
3 Investment advisor
4 Share transfer agent
6 Depository participant
WORKING OF A BROKING FIRM
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.
The functions carried out by Compliance Department are as follows
Reg. of Sub-Broker Reg. Of Client Reg. Of Franchisee
Individual Non Individual
Limited Company Partnership Sole Proprietorship
Registration of Client
Documentation required for individual client as per SEBIs guidelines are as follows
1 Client Registration Application Form.
2 Broker Client Agreement on stamp paper of value as applicable in the
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
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
6 Letter from the bank certifying account number and period from which the
same is in operation.
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
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
- 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
- The applicant should be fit and proper person
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 scrip’s 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.
Entering Order Order Order
Orders Modification Cancellation Matching
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.
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 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.
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
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
The second order price is greater than the first order price and therefore it is the best
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 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.
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.
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
receives a system message confirming the trade cancellation at the workstation of
This department performs the back office function ie settling of trades that takes
place every day. This settling is done under “T+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
Decision to trade Trade execution
Funds and securities Clearing of trades
Settlement of trades
The main functions of this department are as follows
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+X”rolling 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.
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
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
CENTRAL DEPOSITORY SERVICES LTD (CDSL) DEPARTMENT: -
The main activities of CDSL Department are as follows
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 scrip’s 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 DP’s 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 scrip’s 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
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
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
g) Any number of securities can be transferred and delivered with one delivery
order. Therefore paperwork and signing of multiple transfer forms is done
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
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
2 Custodians who are permitted by the stock exchange to act as a clearing
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
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)
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.
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
Transmission and Nomination
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 DP’s 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
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
- Certificate or order of court where deceased has not left a will, Or
- Copy of notarized probate or letter of administration
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
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
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
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
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
R&T AGENT ` DEPOSITORY
1 Client Investor submits the DRF (Demat request form) and physical
certificates to the DP. DP checks whether the securities are available for
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
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.
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.
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
- 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
Transfer of securities from one account to another may be done for any of
the following purposes: -
1 Transfer due to a transaction done on a person-to-person basis (an” off-
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
Off-Market On-Market Inter Depository Intra Depository
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.
DP 1 DP 2
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.
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
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
2 Inter Depository Transfer can be done only for securities that are available
for dematerialization on both the depositories.
3 The account in Depository can be either a clearing account or a beneficiary
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.
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
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
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
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 investment’s actual return will
be different than expected” this includes the possibility of losing some or all of the
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
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.
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.
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.
Dynamic Static Pure Speculative
Dynamic – Associated with changes in the economy
Static – With or without changes in the economy
Pure – Chance of loss or no loss
Speculative – Chance 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.
The investors and some issuers of securities can control some risks by
planning. Others cannot control and they have to bear the consequence
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
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.
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 Don’t risk more than you can afford to lose
2 Consider the odds
3 Don’t 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 investor’s 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.
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
R * Equity
E * Mutual Funds
W * Debentures
A * Fixed Deposits
R * Post Office Certificates
D * Bank Deposits
S * Insurance Schemes
Risk Taken By Investor
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.
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.
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.
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.
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.
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. You’ll probably pick a manager with a winning
personality, persuasive marketing materials and a track record that's impressive.
There’s 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
this risk: by practicing the most fundamental investing technique of all,
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.
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.
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.
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
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
• 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
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
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
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
• 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.
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
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.
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
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.
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
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.
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
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
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.
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
Operational Financial Market Credit Liquidity
Risks Risks Risks Risks 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
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 Business line Human errors
Human recourses Internal fraud
Security Staff shortage/sabotage
TECHNOLOGY Business line technologies Technology failure
Central infrastructure Outmoded system
Data center maintenance Poor data integrity
REGULATORY Compliance Regulator disputes
Finance and accounting Misstatingaccounts
The operational risks found in a broking firm at various departments are as
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
If the compliance department doesn’t 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
introduction, reference from a chartered accountant, bank statement ensures that
the investor is genuine and has no malafide intentions. It wouldn’t 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
4 Trading in wrong scrip ex instead of trading in reliance, trading is done in
5 Entry not made in trade book.
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
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.
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.
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.
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
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 scrip’s, which can’t be controlled.
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.
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 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.
CHAPTER 6- DATA ANALYSIS & INTERPRETATION
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
- Managing project resources and activities while anticipating
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
- 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
6 Shared product vision
- Mutual product vision based on common purpose, shared ownership,
and collective communication
- Focusing on results
- 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
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.
vi. Communicate - Provide information and feedback internal and
external to the project on the risk activities, current risks, and
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
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
Daily margin, comprising of the sum of VaR margin and mark to market margin is
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
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
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 of
trades in normal market in which would result in a margin of Rs 50,000 more, after
applying the margin percentages as given from 15%, 30%, 45%.
Failure to pay margins
Non-payment of either the whole or part of the margin amount due will be treated as a
violation of the Bye Laws of the Clearing Corporation and will attract penal charges
@ 0.09% per day of the amount not paid throughout the period of non-payment.
In case a member has a margin shortage of Rs. 10 lacs or above for more than 10
occasions in the past 4 weeks, the gross exposure multiple of the member will be
reduced to one level lower at the time of re-activation of their trading terminals as
Full Exposure 8.50 times
level 7.00 times
level 5.00 times
level 3.00 times
level 2.00 time
If there is no margin shortage for the next I week of Rs. 10 lacs or more, the exposure
limits shall be restored to the previous levels.
In addition, NSCCL may, within such time as it may deem fit, advise the Exchange to
withdraw any or all of the membership rights of the member including the withdrawal
of 'trading facilities without any notice.
In the event of withdrawal of trading facilities, the outstanding positions of the
member may be closed out, to the extent possible, forthwith or any time thereafter by
NSCCL, at its discretion by placing at the Exchange, counter orders in respect of the
outstanding position of the member, without any notice to the member, and such
action shall be final and binding on the member.
Margins based on turnover & Exposure limits (Initial margins)
Intra-day turnover limit
Members are subject to intra-day trading limits. Gross turnover (buy +sell) intra-day
of the member should not exceed thirty three and one-third (33 1/3) times the base
capital (cash deposit and other deposits in the form of securities or bank guarantees
with NSCCL and NSE).
Members violating the intra-day gross turnover limit at any time on any trading day
are not being permitted to trade forthwith.
Member’s trading facility is restored from the next trading day with a reduced
intraday turnover limit of 20 times the base capital till deposits in the form of
additional deposits (additional base capital) is deposited with NSCCL.
Members are given a maximum of 15 days time from the date of the violation to bring
in the additional capital. Upon members failing to deposit the additional capital within
the stipulated time, the reduced turnover limit of 20 times the base capital would be
applicable for a period of one month from the last date for providing the margin
Upon the member violating the reduced intra-day turnover limit, the above-mentioned
provisions apply and the intra-day turnover limit will be further reduced to 15 times.
Upon subsequent violations, the intra-day turnover limit will be further reduced from
15 times to 10 times and then from 10 times to 5 times the base capital. Members are
not permitted to trade if any subsequent violation occurs till the required Additional
deposit is brought in.
Gross Exposure Limits
Members are also subject to gross exposure limits. Gross exposure for a member,
across all securities in rolling settlements, is computed as absolute (buy value - sell
value), i.e. ignoring +ve and -ve signs, across all open settlements. Open settlements
would be all those settlements for which trading has commenced and for which
Settlement payin is not yet completed. The total gross exposure for a member on any
given day would be the sum total of the gross exposure computed across all the
securities in which the member has an open position.
Gross exposure limit would be:
Total Base Capital Gross Exposure Limit
Up to Rs. 1 crore - 8.5 times the total base capital
> Rs. 1 crore - 8.5 crores + 10 times the total base capital in excess of Rs 1 crore
Or any such lower limits as applicable to the members.
The total base capital being the base minimum capital (cash deposit and security
deposit) and additional deposits, not used towards margins, in the nature of securities,
bank guarantee, FDI; ~ or cash with NSCCL and NSE.
Security-wise Differential Exposure Limits
In case of securities that are traded in the Rolling settlement (Type 'N' and security
series 'EQ'), the GE multiple for each security are as under:
Groups (Securities Covered) Covered Multiple
Group I I time
Group 11 2 times
Group111 5 times
All new securities to be traded on the Exchange shall be subject to exposure multiple
of 2 times.
It is clarified that while computing the gross exposure at any time for a particular
trading day, for the purpose of the above limits, members are required to add the net
outstanding positions of the previous settlement period to the cumulative net
outstanding positions as of that particular trading day until the securities pay-in day
for the previous settlement period.
Members exceeding the gross exposure limit are not permitted to trade with
immediate effect and are not permitted to do so until the cumulative gross exposure is
reduced to below the gross exposure limits (as defined above or any such lower limits
as applicable to the members) or they increase their limit by providing additional base
Members who desire to reduce their gross exposure may submit their order entry
requirements as per the prescribed format if members desire to increase their limits,
additional deposits by way of , bank guarantee or Fixed Deposit Receipt CEDR) have
to be submitted to NSCCL. Additional deposits by way of securities in electronic
form ('demat securities') may be deposited as per procedures.
The additional deposits of the member are used first for adjustment against gross
exposure of the member. After such adjustments, the surplus additional deposits, if
any, excluding deposits in the form of securities is utilised for meeting margin
A penalty of Rs.5, 000/- is levied for each violation of gross exposure limit and Intra
Day Turnover limits, which shall be paid by next day. The penalty is debited to the
clearing account of the member. Non-payment of penalty in time will attract penal
interest of 15 basis points per day till the date of payment.
In respect of violation of stipulated limits on more than one occasion on the same day,
each violation would be treated as a separate instance for purpose of calculation of
The penalty as indicated above, would be charged to the members irrespective of
whether the member brings in additional capital subsequently.
Additional Base Capital
Members may provide additional margin/collateral deposit (additional base capital) to
NSCCL, over and above their minimum deposit requirements (base capital), towards
margins and/ or exposure / turnover limits.
Members may submit such deposits in any one form or combination of the following
II. Fixed Deposit Receipts (FDRs) issued by approved banks
and deposited with Approved Custodians or NSCCL
III. Bank Guarantee In favor of NSCCL from approved banks
in the specified format.
Approved securities in demat form deposited with approved Custodians.
All Additional Base Capital (ABC) given in the form of cash / FDR (hereinafter
referred to as 'Cash Component) should be at least 30% of the total ABC and Cash
Margins in respect of every trading member. Incase where non - cash component is
more than 70 % of the total additional base capital, the excess non-cash component is
ignored for the purpose of exposure limits requirements and / or margins
Exemption for institutional deals
While computing margins, institutional deals are excluded. Deals executed on behalf
of the following entities are considered as institutional deals:
1. Financial Institutions
2. SEBI registered FII’s
4. SEBI registered Mutual Funds
Deals are identified by the use of the participant code in the trades reported on the
Deals entered into on behalf of custodial participants i.e. carrying custodial participant
code are considered as institutional deals unless not confirmed by the respective
custodians in which case the deals shall attract margins.
Non-Custodial Institutional Deals are identified by the use of the participant code
`NCIT'. The NCIT' deals will be exempted for margin purposes (However, VaR based
margin which is charged on institutional trades on the net outstanding sale position, in
securities shall be applicable in this case also) and the settlement obligation will
remain with TM clearing member. Non Custodial Institutional deals, which are not
marked as 'NCIT' at the time of order entry, will not be exempted.
All TM clearing members are required to provide details of the contract notes for all
Non-Custodial Institutional Trades through a file upload as per the procedure
Exemption upon delivery of securities
If members deliver securities prior to the securities pay-in day, then the margin
payable by the member will be recomputed after considering the above pay-in of
securities. The margin benefit on account of early pay-in (EPI) of securities shall be
given to the extent of the net delivery position across across all clients of the member.
The EPI would be allocated to clients having net deliverable position, on a random
basis, till such time that the system is developed to provide the EPI benefit on a client
basis. However, members are required to ensure to pass on appropriate early pay-in
benefit of margin/exposure to the relevant client, until the above system is in place.
The value of the advance pay-in made is reduced from the cumulative net outstanding
sale position of the member for the purpose of gross exposure limits.
Members may note that early pay-in of securities only up to the working day prior to
the scheduled settlement pay-in day shall be considered for the purpose of early pay-
in benefits. In case any member makes early pay-in on the scheduled day of pay-in for
the settlement, no benefit will accrue to the member. Such early pay-in shall not be
adjusted against the settlement pay-in obligation and it would be treated as short
delivery. Members are therefore alerted to ensure that no early pay-in is made on the
scheduled day of settlement pay-in
Pay-in of funds securities prior to scheduled pay-in day
The relevant authority may require members to pay-in funds and securities prior to the
scheduled pay-in day for funds and securities. The relevant authority would determine
from time to time, the members who would be required to pay-in funds and securities
prior to the pay-in day. The relevant authority would also determine securities and
funds which would be required to be paid in and the date by which such pay-in shall
be made by the respective member.
The value of such prior pay-in of funds and securities will not be reduced from the
cumulative net position of the member for the purpose of gross exposure reduction.
There will be no margin exemption available for such pay-in of funds and securities.
Some Risk management are also taken by BSE they are as follows
1 Know your client scheme
Under the procedure the member brokers of the exchange are compulsory
required to obtain detailed information of clients prior to commencement of
any transactions with new clients. A similar procedure is also to be followed
for existing clients. This information is to be made available to the exchange
authorities whenever called for. In case the member brokers fails to furnish the
same it is viewed seriously.
2 Verification of shares at members office
The exchange has outlined the process i.e. in case the transaction in a
script with one particular client in a settlement exceeds Rs 10 lacs then the
member are to send the photocopies of the transfer deeds and the share
certificates to the company/ registrar for verification of the material
particulars. The basic idea behind the introduction of this procedure is to
prevent fake/forged/stolen shares from being introduced in the market.
The department is carrying out inspection of the member brokers records as
regards compliance of the risk management procedures
The exchange presently has in place insurance policies to protect itself in the
event of losses on account of fire, damage to computer systems and a
comprehensive policy that covers risks faced by the exchange, its member brokers
and the clearinghouse.
The risks covered under the basic cover of the policy are detailed as below.
- Loss to members on account of infidelity of employees
- Loss of member on account of fake/forged/ stolen shares being
introduced by his clients
- Direct financial losses suffered by the member broker on account of
physical loss, destruction, theft or damage to securities and cash.
- Loss on account of securities lost in transit
- Loss suffered on account of incomplete transaction
- Loss sustained as final receiving member on exchange on account of
default of the introducing member
- Loss on account of errors and omission
- Directors and officials liability cover
Measures taken by SEBI for Investors protection are as follows
Government of India and SEBI have been stressing upon the need for regulating the
secondary market and bringing transparency in transactions on the floor of stock
The steps taken by SEBI to regulate and control the business of stock exchanges and
reduce the risks of investors are as follows
1 Regulation on insider trading with the object to curb it completely and punish
2 Uniform Trading hours at all the stock exchanges in the country to check
3 Registration of market players- brokers, non member brokers, sub brokers,
registrars to issues, merchant bankers, portfolio managers, underwriters,
debenture trustees, custodians etc so as to have access/inspection of their
books, records and verification of transactions.
4 Compulsory audit of accounts of all member brokers and registered
intermediaries by practicing chartered accountants.
5 Inspection of Stock exchange operations.
6 Indirect supervision through stock exchanges in day-to-day business by fixing
margins, imposing curbs, penalties and fines.
7 Gradual automation to reduce paper work and ensure transparency in
transactions this is now almost complete and all stock exchanges have been
8 Brokers contact notes to mention brokerage separately.
9 Nationwide paperless trading through over the counter exchange of India,
National Stock Exchange, BSE, DSE and other exchanges.
10 Transfers to be affected within two months as per companies act and within
one month as per listing agreement.
11 Brokers should notify all transaction to the stock exchanges including off the
12 Uniform good/bad delivery norms.
13 Capital adequacy norms prescribed for brokers.
14 Brokers to keep clients money in a separate bank account.
15 Forward trading being banned on stock exchanges
16 Stress upon shorter settlement period.
17 Dematerialization of securities permitted on a selective basis. By March 2001,
about 3500 companies will have compulsory trading in demat mode.
18 Stern action against erring brokers, stock exchanges, companies, merchant
19 Regulation for fraudulent trade practices
20 Total transparency and automation of stock exchanges.
21 Effective margin system for smooth settlement.
22 Circuit breaker system to check volatility on the exchanges
23 Introduction of modified carry forward system and automated lending
borrowing mechanism (ALBM).
24 Introduction of Internet trading.
25 Derivative trading in index based futures of 30, 60 and 90 days.
26 Practicing prudent governance norms.
27 Stock lending.
28 Abolition of no delivery period in demat scrip’s.
Recent Development steps taken by SEBI for Investor protection
1 Appointment of administrators to check bad deliveries
To get rid of bad deliveries, SEBI has decided to appoint administrator to
implement the signature guarantee and certificate authentication programs. The
administrators appointed by SEBI act on behalf regulator in resolving problems
arising out of signature mismatch
2 Streamlining Investor protection fund
The committee set up by SEBI to review the sources and utilization of investor
protection fund of stock exchanges has made following recommendations
- Funds should be on trust structure and set upon under Indian Trust Act,
1882 with independent trustees
- Regular contributions from active member brokers and stock
- Fund to be utilized only for investor claims and not broker claims.
- Trustees to ensure that fund is not deployed in risky instruments or for
the benefit of any member but only in prescribed avenues.
- Time schedule to be specified while setting investor claims.
3 Service centers for investors
SEBI has directed all stock exchanges to constitute service centers for investors to
enable the investors to have a form for recording and counseling of their
grievances as well as access financial and other information of companies on
government policies, rules, regulations, etc.
4 Compliance Officer
Each company is required to appoint compliance officer who would be able to
verify rumors and information floating in the market about the company to the
stock exchange. This will reduce motivated rumors about companies, which aids
in price manipulation.
5 Corporate Governance
SEBI has prescribed prudent corporate governance norms for all listed companies
to ensure transparency and better disclosure practices.
6 Investor Education
SEBI has taken steps to educate investors through various awareness programmes
CHAPTER 10- CONCLUSION OF THE STUDY
Working with a broking firm especially was really a great experience.
1 The researcher found that the working of a broking firm is a very risky job
because risk is involved in each and every activity of the business.
2 The risk prevailing in the business is recognized therefore an efficient risk
management department is essential in every broking firm.
3 Capital Market is growing very fast, turnover wise as well as area of
operation wise. The activities have reached through lengths and breadth of
the country. All these necessitated in the introduction of latest technology
in the form of advanced software’s.
4 Efficient staff and technology is the base of broking industry.
5 Broking business is a client-based business. The recent trends of
voluminous increase in investors has also increased the risk involved in it.
There is need of continuous up gradation of internal control measures
6 Staff in a broking firm is continuous busy and due to which they are
always under stress.
CHAPTER 11- RECOMMENDATIONS & SUGGESTIONS
1 Every Organization should have a risk management policy that is approved
by the board of directors annually. The policy should outline
- Products Traded
- Parameters for risk activities
- Limit Structure
- Over Limit approval Procedure
- Frequency of review
2 An Organization should have a risk management function that is
independent of its trading staff i.e. personnel responsible for the risk
management function should be separate from trading floor personnel.
3 Ideally an institution should be able to identify the relevant risks and
should have measurement systems in place to conceptualize, Quantify and
control these risks on an institutional level using a common measurement
4 Senior management should regularly evaluate the risk management
procedure in place to ensure they are appropriate and sound.
5 Senior management should also foster and participate in active discussions
with the board of directors, sub brokers, franchisee, staff of risk
management function and investors regarding procedures for measuring
and managing risk.
6 Highly qualified staff not only in front office positions such as trading
desk, relationship officer and sales but also all back office functions
responsible for risk management and internal control.
7 An organization should have an integrated management system that
controls market risks and provide comprehensive reports.
8 Risk management or control function should be able to produce a risk
management report that highlights positions, limits and excess on a basis
commensurate with trading activity. This report should be sent to senior
management, reviewed, signed and returned to control staff.
9 A periodical compliance review should be conducted to ensure conformity
with the rules and regulations.
10 Auditors should perform a comprehensive review of risk management
annually, emphasizing segregation of duties and validation of data
11 For avoiding market risk the organization should ensure that they
adequately measure, monitor and control the market risk in their trading
activities. the various methods like mark to mark and value at risk
approach can be used for trading operations. Some more measures which
can be used are Delta, Gamma, Vega, Theta etc
12 Every Organization should have “Know Your Customer” policy and this
should be understood and acknowledged by the trading and sales staff.
13 Every organization should check cash flow statement and balance sheet of
last two years of a client before starting business with him.
14 Taping of trader and dealer telephone lines will facilitate to resolve the
disputes and can be a valuable source of information to auditors, managers
15 The designated compliance officer should perform a review of trading
SCOPE FOR DEVELOPMENT (HDFC SEC)
HDFC SEC have set themselves very stringent and high standards of Risk
Management. However I would like to make a few points, which would help the
organization in a big way.
1 Recording of trader and dealer telephone calls, which will facilitate to resolve
the disputes at different levels.
2 Fast and frequent interaction between the risk managers, the sub brokers and
client will help in reducing the delay in giving limits.
3 Periodical visits to the sub brokers and franchisee by the HDFC SEC
personnel for interaction and inspection will help in minimizing the risk to
4 Regarding dealers risks, well-trained and less stressed dealers will help in
reducing the mistakes. It has been observed that most of the mistakes are done
when they are under stress. HRD must help in this matter.
5 In settlement department the persons have be appointed with utmost care and
their periodic check can be conducted to avoid any employee fraud.
6 Before starting business with any client his financial capability should be
checked, by checking his cash flow statement.
7 Along with large client base, quality of clientele will help in balanced growth
of business and minimizing the risk.
LIMITATIONS OF STUDY
To understand the overall working of share market, the period of 60 days is
Moreover, very few investor and agents have a detail knowledge of the study.
The study was conducted in Nasik only, which restricted the scope of the
The data provided by the investor and the agents can’t be held true as 100%
The study was conducted to understand with respect to Risk involved in
broking firm and investors, which is a part of the equity share market.
CHAPTER 12 - BIBLIOGRAPHY
Various books of Equity Management.