Association of National Exchanges Members of India

Presentation to Bombay Stock Exchange

July 30, 2014

1

ANMI Representation to BSE

A. Business Development Issues

Issues Observations Suggestions

Introduction of e- KYC

It will act as comprehensive platform

for the Investors which will help them

mapping KYC documents &

requirements electronically.

The investors can open Trading

Account by submitting paper

documents in digital format in secured

way.

We suggest introducing e-KYC. Inter

alia, it will help in the following:

No Physical documents

Reduced TAT

Account Opening at Remote Locations

Secured & will have privacy

Annexure Attached- A

Workshop/Training/ Compliance/Money Launder Act Program

Majority program are done at their

regional place only.

Exchange should arrange Program at

every regional place where Majority

Members can attend the said program

at least once in a year.

2

B. Compliance Issues

Issues Observations Suggestions

Trading Terminals and Approved Users

As per extant SEBI regulations, the

trading terminals can be installed only

at the broker’s head office, branch

office, sub broker or authorized

person’s office. The physical location

details of the trading terminal should

be intimated through the interface

provided by the exchanges.

It will not be feasible for the Broker to

check this compliance from a central

location as the dynamic IP address of

all such trading terminals will not allow

any central monitoring of the physical

address of such internet connected

trading terminals.

Periodic onsite audits covering 10 % of

the active sub brokers/ authorized

persons will continue as is done today

but it can never ensure 100%

assurance with this compliance

requirement which was relevant when

connectivity was based on leased

lines/ VSAT.

In the era of Internet, this requirement

may no longer be relevant or

practically feasible. Hence, we suggest

that this requirement should be done

away with.

Annexure Attached-B

Client Running Balance beyond 5 days Debit balance continuous for 5 days

(beyond T+5) is treated as temporary

margin funding.

The threshold minimum may be made

as 1 lakh per client for this requirement

- similar to client funding upload.

In case where debit is more than Rs. 1

lakh, but the collateral is more than

sufficient, then debit may be allowed.

In any case, quarterly settlement

system prevails.

Self Trade Issue wrt Multiple Pro Account Ids

The business model of many

proprietary trading brokerages is to

employ a large number of traders,

In the case of members with many traders

trading using the pro account, it is entirely

3

each of whom is given a terminal and

a unique user ID as per exchange

requirements.

A large number of pro account

brokerages have deployed algo based

trading for high frequency as well as

arbitrage. These are also conducted

by traders using their trading interface

to enter parameters.

Therefore, there are a large number of

traders/user ids, all being operated

independently but under the pro code

of the broker.

possible that the trades have taken place

between these traders (user ids), though

on the exchange. However, as each of

these traders in on pro account, the trade

belongs to the same member.

We appeal BSE to take this issue with

SEBI and request them to consider the

‘User ID’ as the point of analysis for

calculating “self trades” instead of the

‘member ID’. Otherwise incidental activity

of “self trades” will be construed as unfair

trade practice.

There is an urgent need to resolve this

matter as it could lead to a virtual halt of

pro account trading by members.

C. Cost Issues

Issues Observations Suggestions

Reduction in Transaction Costs The Transaction Costs have not been

reduced for a considerable period of

time.

We request for reduction in the

transaction costs, especially in Cash

market.

High Penalties We request for reduction in the penalties.

4

D. Other Issues

Issues Observations Suggestions

Arbitration Reforms Clients default at one broker and trade

at another.

Members are obliged to report the

same to the stock exchanges.

If broker trades with defaulter, it is

considered violation of code of

conduct.

Voice recording is not mandatory but it

is observed that in many cases

absence of voice recording is taken

against the member during arbitration.

In cases where clients lose at

arbitration against the broker, we

request BSE to debar such clients from

further trading with any broker, adjust

the dues if available with other broker

(details available in UCC database),

prohibit the client from directly or

indirectly trading through the

exchanges till such time the client

deposits the award money in an

escrow account. The funds may be

released or impounded based on the

verdicts obtained in the appeal forums

available to the client.

Non-production of voice recording

should not be held against the member

as member is able to furnish other

evidences.

Monthly / Quarterly Settlement of funds

and securities

Easily done by banks (3 in 1

accounts), difficult for others.

Clients do not come back.

Inconvenience to clients.

Statement at odd times.

FDR created out of client funds not

allowed.

Half yearly and Annual Option may be

introduced.

We request to waive off requirement

for quarterly settlement for amounts

below Rs. 1 lakh.

If member chooses calendar quarter

statements, then settlement statement

need not be sent.

We suggest, FDR created out of client

funds should be free from settlement

5

obligations if a clear Audit Trail is

available attributable to each FDR.

PAN number compulsory Currently PAN is compulsory (except

Sikkim)

Leaves out a lot of the population like

villages (a huge roadblock for financial

inclusion).

We suggest that where a person has

AADHAR, PAN should be made

optional for such persons (subject to

declaration that client does not have

PAN at all) & subject to investment of

Rs. 2.5 lakh. The same may be

monitored by depositories using

AADHAR data.

Rectification of Trade Error beyond online

modification deadline.

Online trades moved to ERROR

account. If errors are discovered after

market close, what to do?

We advise to allow movement to

ERROR with due noting in ERROR

register, for errors discovered post-

market hours. Any movement to

ERROR account is anyway free of

penalty.

Post market errors to be reported in

Internal Audit Report and checked

during Inspection.

Such Errors to be reported to

exchange before Pay in.

Pledging of Securities as Collaterals

All the custodians charge heavily

(0.04%) for creation and removal of

pledge (mostly in terms of percentage

of volume) in addition to the charges

levied by depositories.

The trading members that are also

depository participants should be

allowed to pledge securities directly

from their own DP accounts to the

clearing corporation. Pledging

securities from TM’s own account does

NOT pose any additional threat to the

system.

Request to reduce Custodial charges

to Rs. 5 per transaction, until

6

implementation of above suggestion.

Acceptance of type of Collaterals

Government bonds, FMPs, MF units,

NSE listed debentures of A-group

companies, tax free listed bonds etc.

are not allowed as collateral.

We request the Exchanges to approve

these as collateral. An early approval

of this will provide much needed

financial flexibility to members.

Fungible Collaterals

Currently, brokers are having online

facility for the transfer of FDRs from

one segment to the other segment but

not for Securities.

We advise that online facility be

provided to the brokers for the transfer

of collateral security from one segment

to the other.

Internal Audit Separate Reports for all Exchange

Segments.

We request that a common format be

worked out for reporting at all

exchanges.

Net worth Certificates We request the exchanges to develop

a uniform format for net worth

certificates. Common criteria for net

worth calculation may be used.

UCC Data Management

Every exchange & depository has its

own set of data formats and separate

rules for UCC file uploads /

modification. E.g. State & Pin codes

masters are separate for each

exchange thereby for a single

customer data has to be managed and

uploaded in 3-4 different formats which

can easily be unified.

Further, data modification is also

permitted by some exchanges and

other exchanges do not allow changes

easily or have different rules for the

same.

We request for a unified format.

We request for a set of common rules

in the interest of members.

7

CTCL ID In BSE, while uploading IML id, option

should be given to member for

selection of segment - cash, F&O or

currency.

IML/CTCL report should be provided

segment wise to the members.

NISM Every three year exam is to be taken. We request that exam should be taken

only once and then it should be

automatically renewed with the said

person confirmation and binding.

Square off in case of shortfall.

Member has to inform client to square

off their position.

Incase if member wants to square off

first he has to take consent from client.

Member should be allowed to take

written consent from client for square

off position in case of shortfall, during

the time of KYC. This will help

member during market fluctuations.

Website Exchange has got BEFS, E-Boss,

Extranet, RTRMS etc.

We request for a single website

between Exchange.

System Audit

System Audit Report has been made

very complicated and lengthy.

We advise that System Audit Report

should be common and made very

easy with all exchanges.

ANNEXURE- A

E-KYC/ Green KYC

What is Green KYC ?

• Green KYC is the next generation KYC platform for managing KYC electronically.

• Green KYC management is focused on addressing the key requirements & challenges

faced by the Investors during account opening.

• Green KYC provides comprehensive platform for the Investors which will help them

mapping KYC documents & requirements electronically.

• The investors can open Trading Account by submitting paper documents in digital format

in secured way.

Advantages of Green KYC

1) No physical documents

Green KYC will useful for Investors to open trading account using electronic

copy of their proof of identity, address & income in digital format.

2) Reduced TAT

Green KYC will open doors to innovative service provision for the Investors as a

hassle free system which will reduce TAT for Account Opening Process.

3) Account opening at Remote Locations

Digital devices such as Tablet PCs, Smart Phones, or Laptops along with

limited Internet connectivity this service can be extended across PAN India even

at remote locations which will help investors to open Trading Account easily.

Security & Privacy – Green KYC

1) Green KYC is instantaneous, totally secure & this will also enhance Privacy of data of

the Investors.

2) All Proofs for account opening will be digitally Scanned by the portable devices including

the photo identity proofs & stored using digital certificates.

3) Clients will sign the KYC form using Wet Signature using portable digital equipment this

will store clients signature in digital format.

4) This Process will also act as IPV which will help in :-

Customer Validation

Audio/Video consent can be taken at the time of account opening

It will reduce frauds at great extent

5) Green KYC in collaboration with UIDAI E-KYC will play a significant role in client

authentication.

Process Flow of Green KYC :-

1) The sales person will launch the Green KYC application on his digital equipment

2) The sales person will select the documents the customer need to provide against the

required list.

3) The sales person will captures the images of the documents.

4) The sales person will ask the Investor to sign the document on the digital instrument

itself or on separate paper and the document can be uploaded

5) The Green KYC app will attach the signature to the documents & Application form.

6) The system will generate the application reference number of the Investor to tag the

KYC form in the system.

7) The application once submitted from the Sales person synchs the data back to

the central application for back office processing.

Account Opening of Green KYC :-

1) Investor will confirm his willingness to open trading account based on that sales

executive will be assigned.

2) Sales person will intimate Investor the checklist of documents required to open

Trading Account & ask him to be ready with those documents.

3) The sales person will fill up the KYC application form of the investor he will

capture the images of the documents, signature, photo of the Investor on digital

device. Ref number will be sent to the Investor through SMS & email.

4) After the Backend KYC Validations Investors trading account will be generated &

intimation will be send to customer.

ANNEXURE- B

Trading Terminals and Approved Users

Regulation: As per extant SEBI regulations, the trading terminals can be installed only at the broker’s head office, branch office, sub broker or authorized person’s office. The physical location details of the trading terminal should be intimated through the interface provided by the exchanges.

Background: Most of the trading terminals used across the country today use the Intermediate Message Layer (IML) or the Computer to Computer Link (CTCL) by which brokers can use their own trading front–end software in order to trade. Due to the expansion of the branch and franchisee network across the country the exchanges allowed brokers to set up their own network of trading terminals where the broker’s server is connected to the server of the exchange through Internet/ Leaseline / VSAT.

Details of contravention: Location of terminal at a place other than the main / branch office and the offices of the registered sub brokers/ authorized persons of the member will attract a financial penalty of Rs.50000/ - per terminal.

Connectivity:

1. Internet is, by far, the preferred mode of connectivity across most sub broker terminals because of the minimal infrastructure requirements and low costs of setting up an internet based trading terminal. Terminals which are connected on the internet have a dynamic IP address unlike a leased line or VSAT connection which has a static IP. Though Sub Brokers and Authorised persons register their address at the time of registration , use of internet data cards / wi-fi connections from alternate locations( other than their registered address) such as home or other work place, is a reality because Internet connectivity cannot be restricted to a fixed location. Leased line and VSAT connectivity is not a feasible option for sub brokers/ authorised persons as they are very expensive and require significant enhancement in office infrastructure.

2. Additionally, ISP service providers such as BSNL, MTNL, and the private ISP players etc are not willing to provide fixed IP address for so many trading terminals across the country, even at a cost. The Broker is severely constrained in setting up any central mechanism to monitor and control the log in of trading terminals from a location that can only be the registered address of the terminal reported to the Exchange.

3. It is pertinent to note that Internet based trading terminal provided directly by NSE called NOW, also does not have any control mechanism to restrict the physical location from where the trading terminal is used.

Recommendation: It will not be feasible for the Broker to check this compliance from a central location as the dynamic IP address of all such trading terminals will not allow any central monitoring of the physical address of such internet connected trading terminals. Periodic onsite audits covering 10 % of the active sub brokers/ authorized persons will continue as is done today but it can never ensure 100% assurance with this compliance requirement which was relevant when connectivity was based on leased lines/ VSAT. In the era of Internet, this

requirement may no longer be relevant or practically feasible. Hence, we recommend this requirement should be done away with.