Securities Contracts Regulation Overview
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Questions and Answers

What is required for a stock exchange to obtain recognition from the Board according to the Securities Contracts Regulation?

A copy of the memorandum of association, articles of association, bye-laws, and other documents.

What does the 2018 Securities Contracts Regulation focus on regarding stock exchanges?

It focuses on the recognition of exchanges and clearing corporations.

What are the implications of the SCRA 1956 on stock exchanges in India?

It regulates the establishment and operation of stock exchanges in India.

What role do bye-laws play in the functioning of recognized stock exchanges?

<p>Bye-laws set the internal rules and procedures for the operation of the exchange.</p> Signup and view all the answers

How can a person legally conduct activities related to a stock exchange in India?

<p>They must obtain recognition from the Board and comply with the necessary regulations.</p> Signup and view all the answers

What are the four primary intermediaries in the commodity derivatives market in India?

<p>Stock Broker, Repository Participant, Bank, Clearing Corporation.</p> Signup and view all the answers

What essential criterion must an applicant meet to gain membership in a Commodity Exchange?

<p>An applicant must possess the minimum stipulated networth.</p> Signup and view all the answers

What is the primary function of the Clearing House in a commodity exchange?

<p>The Clearing House manages margins, clearing, and settlement of trades.</p> Signup and view all the answers

What role does the Investor (Client) Protection Fund play in commodity exchanges?

<p>It provides protection to investors against potential losses from broker defaults.</p> Signup and view all the answers

How does SEBI ensure market integrity in the commodity derivatives market?

<p>SEBI designed processes with multiple checkpoints and created commodity market intermediaries.</p> Signup and view all the answers

What is the purpose of the Settlement Guarantee Fund in a commodity exchange?

<p>To provide a guarantee for the settlement of trades, ensuring financial stability.</p> Signup and view all the answers

What is the responsibility of the Investor Service Centre (ISCs) in the commodity exchanges?

<p>ISCs address investor inquiries and grievances.</p> Signup and view all the answers

What do the bye-laws of a commodity exchange regulate?

<p>They regulate trading practices, membership criteria, and operational procedures.</p> Signup and view all the answers

What is the minimum paid-up capital required for corporate members?

<p>Rs. 30 Lakhs.</p> Signup and view all the answers

Identify the age requirement for individual members seeking admission.

<p>At least 21 years old.</p> Signup and view all the answers

What must a member do in order to be activated for trading?

<p>Receive a Unique Membership Code (UMC) from SEBI.</p> Signup and view all the answers

Name one condition that would make an individual ineligible for membership.

<p>Not having Indian citizenship.</p> Signup and view all the answers

What happens if an individual has been previously expelled from another Commodity/Stock Exchange?

<p>They can be refused admission unless one year has elapsed since their expulsion.</p> Signup and view all the answers

List one reason related to financial failure that can disqualify a body corporate from membership.

<p>Being adjudged bankrupt.</p> Signup and view all the answers

What is a potential consequence of being convicted of an offense involving fraud for a proposed member?

<p>Ineligibility for membership.</p> Signup and view all the answers

What is one of the eligibility conditions regarding net worth for membership?

<p>It must meet requirements as prescribed by the Exchange from time to time.</p> Signup and view all the answers

What is the minimum public shareholding requirement for a company limited by shares in India?

<p>Not less than 51%.</p> Signup and view all the answers

What is the maximum limit for individual shareholders in a stock exchange?

<p>Not more than 5 percent.</p> Signup and view all the answers

What type of directors must be included in the governing board of a recognized stock exchange?

<p>Shareholder directors, Public interest directors, and the Managing Director.</p> Signup and view all the answers

How must the number of public interest directors compare to shareholder directors?

<p>It must not be less than the number of shareholder directors.</p> Signup and view all the answers

What is the maximum combined ownership of foreign investors in a stock exchange?

<p>Shall not exceed 49 percent.</p> Signup and view all the answers

What is the obligation of clearing corporations regarding good delivery in commodity derivatives?

<p>They must ensure delivery of goods is in proper form and meets contract specifications.</p> Signup and view all the answers

What is the priority for clearing corporations in recovering dues from clearing members?

<p>It has priority over any other liability or claim against the clearing member.</p> Signup and view all the answers

What does settlement in the context of clearing corporations entail?

<p>Settlement shall be final, binding, and irrevocable.</p> Signup and view all the answers

Who has the power to frame and amend Business Rules/Regulations for exchanges?

<p>The Relevant Authority.</p> Signup and view all the answers

What two requirements must a company limited by shares satisfy to be fit for purpose?

<p>Fit and proper shareholders and directors, specified net worth requirements.</p> Signup and view all the answers

What is the role of statutory committees in stock exchanges?

<p>To oversee various functions like grievance redressal and risk management.</p> Signup and view all the answers

What determines the payment and settlement in exchanges?

<p>It is determined in accordance with the netting or gross procedure specified in the bye-laws.</p> Signup and view all the answers

Can a clearing corporation hold any interest in a recognized stock exchange?

<p>No, they shall not hold any right, stake, or interest.</p> Signup and view all the answers

What must an applicant demonstrate regarding financial capability for it to be recognized?

<p>They must have financial capacity, functional expertise, and infrastructure.</p> Signup and view all the answers

What is the limit for cash as collateral, according to the Collateral Valuation Matrix?

<p>The limit for cash as collateral is the full limit.</p> Signup and view all the answers

What are considered cash equivalents in collateral valuation?

<p>Cash equivalents include bank guarantees, fixed deposits, and eligible government securities.</p> Signup and view all the answers

How does the valuation of non-cash collateral differ from cash collateral?

<p>Non-cash collateral is governed by upper caps at both the individual security level and the overall security level.</p> Signup and view all the answers

What is the ratio requirement for an interest-free security deposit in collateral valuation?

<p>The requirement is a minimum of 50% in cash and the balance in fixed deposits or bank guarantees.</p> Signup and view all the answers

What is the exposure limit for base minimum capital in cash, according to the matrix?

<p>The exposure limit for base minimum capital is set at 25% in cash.</p> Signup and view all the answers

What are members obligated to maintain regarding financial records and accounts?

<p>Members are required to maintain necessary books of accounts, documents, and records.</p> Signup and view all the answers

What role does KYC play in the registration process for clients of members?

<p>Members must ensure KYC for all clients to maintain a uniform client registration process.</p> Signup and view all the answers

What is the members' responsibility concerning margin collections from clients?

<p>Members are responsible for margin collections from their clients.</p> Signup and view all the answers

What is the minimum net-worth required for non-corporate entities to be eligible for TM membership?

<p>Rs. 10 Lakh</p> Signup and view all the answers

State the minimum base minimum capital (BMC) cash deposit required for corporate entities without algo trading facility.

<p>Rs. 2.5 Lakh</p> Signup and view all the answers

What is the one-time admission fee for TM membership?

<p>Rs. 5.00 Lakh</p> Signup and view all the answers

Which types of entities are eligible to apply for TM membership?

<p>Corporates, Registered Partnership Firms, LLPs, and Sole Proprietors/Individuals.</p> Signup and view all the answers

What are the annual membership fees for TM, including applicable tax?

<p>Rs. 0.20 Lakh</p> Signup and view all the answers

Define the role of Trading cum Clearing Members (TCMs).

<p>TCMs execute trades on their own account and for clients, and they can clear and settle these trades themselves.</p> Signup and view all the answers

What is the interest-free cash deposit (IFSD) amount required for non-corporates applying for TM membership?

<p>Rs. 10 Lakh</p> Signup and view all the answers

What is the SEBI annual regulatory fee for TM membership?

<p>NIL</p> Signup and view all the answers

Study Notes

Commodity Exchanges - Intermediation, Institutions, and Products

  • Commodity exchanges facilitate trading of various goods and services
  • Key institutions involved in the process include exchanges, brokers, and clearing corporations
  • Regulations govern the operations of commodity exchanges
  • Regulations specify recognition criteria for exchanges and clearing corporations
  • The regulations require a company limited by shares, demutualization, proper shareholders and directors, specified net worth requirements, and financial capacity

Recognized Stock Exchange - Legal Framework

  • Exchange MOA & AOA are crucial documents
  • Exchange Rules and regulations govern trading, business, and bylaws
  • The Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, govern the recognition of exchanges and clearing corporations
  • This regulation specifies the documents required for an application, including copies of the memorandum of association and articles of association
  • It outlines the requirement for company structure, shareholder qualification and directors' attributes
  • Financial criteria, including net worth and experience, are specified
  • Ownership specifics are detailed; public shareholding must exceed 50%
  • Restrictions are placed on individual ownership, at a maximum of 5%
  • Provisions for stock exchange and clearing corporation governance are included
  • Shareholder and public interest directors must be included, along with a managing director
  • The number of public interest directors must not fall below the number of shareholder directors
  • A code of conduct is specified, as well as compensation and tenure for key personnel
  • Guidelines for statutory committees are detailed
  • Committee responsibilities include functional, redressal, nomination and remuneration, oversight (technology, advisory, regulatory oversight, and risk management)

Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018

  • Recognizes exchanges and clearing corporations
  • Applications are made to a board of approval
  • Articles of association, bylaws, and other documents are necessary for recognition
  • These documents must align with the regulation's framework

Ownership of Stock Exchanges and Clearing Corporations

  • Public shareholding must be at least 51%
  • Restrictions on ownership are defined for individuals, firms, and foreign investors
  • Maximum combined ownership for foreign investors is 49%
  • No stock exchange or clearing corporation shall hold a stake in any recognized stock exchange

Governance of Stock Exchanges/Clearing Corporations

  • Shareholder directors, public interest directors, and managing directors are included in the governing board
  • A minimum number of public interest directors must be present
  • Key personnel must follow a code of conduct, with specifications on compensation and tenure
  • Committees must be established, comprising functional, redressal, nomination and remuneration, and overseeing technology and risk management

Obligation of CC in Commodity Derivatives

  • Ensuring good delivery of goods. Quality and quantity must adhere to contract specifications.
  • Clearing corporations' right to recover dues from clearing members. Collaterals, deposits, and assets are prioritized for repayment
  • Final settlement should be irrevocable

Exchange - Bye Laws

  • Relevant authority holds power to frame rules
  • Relevant authority has powers to alter, modify, and repeal rules
  • Regulations should provide for necessary authorization to handle operational requirements
  • Transactions, clearing, and settlements must comply with exchange risk management and surveillance
  • Establishment of settlement guarantee fund, client protection fund, and other funds

Exchange/CC - Bye Laws

  • Clearing House of the Exchange
  • Margins
  • Clearing and Settlement
  • Delivery
  • Settlement Guarantee Fund
  • Investor (Client) Protection Fund
  • Clearing Limits
  • Code of Conduct
  • Investor Service Centre (ISCs)
  • Investor Grievance Redressal
  • Arbitration
  • Reports

Trading - Flow Chart

  • Flow of trading between buyers, sellers, brokers, stock exchange, and clearing house
  • Entities involved in the transaction are identified

Introduction

  • Key intermediaries in commodity derivatives market are identified
  • These are Stock Broker, Repository/Repository Participant, Bank, and Clearing Corporation

Membership - Introduction

  • SEBI governs membership for commodity derivatives
  • Procedures of recognition, different member types and eligibility criteria are laid out
  • There's an emphasis on members' net worth, fees, and different categories

Membership - Overview

  • Commodity Exchanges have different eligibility criteria for membership classes
  • Commodity exchanges consider factors, such as the applicant's net worth to determine eligibility
  • The net worth varies across exchanges based on regulations, rules, and bylaws
  • Membership categories are largely similar but differ in criteria, fees, and eligibility

Membership - Eligibility Criteria

  • Individuals, Sole proprietorships, Partnership Firms, Limited Liability Partnerships, Companies, Corporations, or institutions are eligible for membership
  • Minimum age, education, and experience are requirements
  • Minimum paid-up capital is also a criterion

Eligibility Conditions for Membership

  • Membership criteria, including Indian nationality, age, net worth requirements, registration with SEBI, and uniquely numbered membership codes are highlighted

Provisions - Ineligibility to become a Member

  • Ineligibility conditions, including Indian citizenship, actions that lead to entity liquidation, being a bankrupt, having been convicted of fraud or dishonesty. Expulsion from other exchanges, failing to meet necessary eligibility criteria for membership

Membership Admission Process

  • Submission of application along with payment and documents
  • Review by a membership selection committee
  • Exchange and SEBI registration to become members of the trade
  • Activation of trading rights

Types of Membership

  • Categories of membership, including Trading Member (TM), Trading-cum-Clearing Member (TCM), Institutional Trading-cum-Clearing Member (ITCM), and Professional Clearing Member (PCM)

Trading Member (TMs)

  • Trading Members/Stock Brokers can trade on their own or clients' accounts
  • Clearing and settlement handled through a clearing member
  • These members must affiliate with an appropriate clearing member

TM - Entities Eligible

  • Eligibility criteria for Trading Members in various corporate and individual categories are laid out

TM - Eligibility Criteria

  • Non-corporate and corporate eligibility with conditions like minimum net-worth and capital requirements, cash deposits, and other fees
  • Minimum net worth and minimum capital requirements are detailed

TCM - Entities Eligible

  • Eligibility criteria for Trading-cum-Clearing Members in various categories are detailed

TCM - Eligibility Criteria

  • Criteria for Trading-cum-Clearing Members including minimum net worth, base capital, and other fees are outlined

Institutional Trading cum Clearing Members (ITCM)

  • Institutional members can trade on their own or for clients and settle trades
  • Members of clearing corporations can trade and settle transactions
  • Eligible entities are Companies/Institutions

ITCM / STCM - Eligibility Criteria

  • For ITCM/STCMs, minimum net worth, base minimum capital, and other fees are specified

Professional Clearing Member (PCM)

  • PCMs are clearing members, distinct from trading members
  • They clear trades for TM and TCM members

PCM - Eligibility Criteria

  • Criteria for Professional Clearing Members include minimum net worth, base capital, deposit requirements, and fees

Authorized Persons(APs)

  • Sub-brokers will evolve to authorized persons.
  • Compliance with exchange bye-laws is necessary.

Collateral Valuation Matrix

  • Valuation elements, including cash and non-cash collateral, and limits

Member's Responsibility

  • Responsibility in maintaining net worth
  • Obligations for acts of authorized persons
  • Maintaining books, accounts, and KYC
  • Financial integrity
  • Maintaining high standards of conduct

Member Compliance

  • Compliance to codes of advertisement, SEBI turnover fees, stamp duty and member disclosures and compliance, compliance handbook, calendar, compliance training, client records
  • System audit and cyber security measures

Enhance the Participation in CDM

  • Formation of CDAC - Commodity Derivative Advisory Committee
  • Permitting new participants on the ETCD (Exchange Traded Commodity Derivatives)
  • Different phases/stages for various entities to participate are described
  • This includes Alternate Investment Funds, Portfolio Management Services, Mutual Funds and direct foreign participation in investments related to commodities

Amendment of Regulations

  • Appropriate amendments to specific SEBI regulations

Cat III AIFs - Participation in Commodity Derivatives Market

  • Category III AIFs (Alternative Investment Funds) are allowed to participate in commodity derivatives products with set limits

Guidelines on ETCD - Mutual Fund

  • Permissible mutual fund schemes
  • Investment limits and restrictions for Gold ETFs are described
  • Limits for gold related instruments
  • Additional limits for gold deposit schemes

Guidelines on ETCD - Mutual Fund

  • Allowed to invest in commodity derivatives, excluding restrictive items
  • Regulations regarding physical goods investment are delineated
  • Provisions for dealing with physical delivery are stated
  • Dedicated Fund Manager responsibilities, and custodian qualifications are explicitly stated

Institutional Participants in ETCD - Dos and Don'ts

  • Participation of mutual funds, portfolio management services (PMSs), and foreign entities are mentioned
  • Detailed insights into participating entities and their respective dos and don'ts

Institutional Participants in ETCD - Dos and Don'ts

  • Dos and don'ts for banks, including their clearing and settlement roles
  • Specific guidelines for permissible activities for different entities

Opportunities for Commodity Value Chain Participants

  • New opportunities for retail and corporate investors, fund managers, exchanges, trading/clearing members, and warehousing/vault providers

Warehousing

  • Comprehensive warehousing norms and financial safeguards by SEBI
  • Minimum net-worth and performance guarantees, corporate governance
  • Criteria for participating in the derivatives market of the commodity are detailed

Custodian Role

  • Maintaining commodity balances as electronic balances, title documents and physical good safe-keeping
  • Asset servicing, regulatory affairs and confidentiality.

Custodian Role : Responsibility Scope

  • Safeguarding assets, segregation of assets, bankruptcy-remote holding processes
  • Insurance coverage standards and other risk management measures
  • Regulatory and audit reporting, infrastructure, and BCM aspects

Commodity Custody : Key Risks

  • Risks associated with the commodity market model, safekeeping, and operational elements
  • Risks of multiple locations, delivery, and process deviations are discussed

Role of Regulatory Oversight Committee Regarding Product Design

  • Mandatory oversight committee of the Governing Board for stock exchange
  • Committee oversees product design related issues

Product Advisory Committee (PAC)

  • Each recognized commodity exchange dealing in commodity derivatives constitutes a PAC for related commodities.
  • Oversight of product design and resources allocated to the function; terms of reference
  • Composition, proceedings, and disclosure requirements are also addressed

MCX - Gold Futures

  • Contract start day and last trading day
  • Trading unit and quotation/base value are specified
  • Price quote, maximum order size, tick size, and minimal price movement
  • Daily price limit, initial margin, and extreme margin loss
  • Additional and/or special margin requirements for positions
  • Allowable open positions and client/member requirements

MCX - Gold Futures

  • Detailed specifications, including delivery unit, period, margin, delivery centers, quality specifications, staggered delivery, due date, settlement pricing logic, and delivery process

NCDEX - Chana Futures

  • Specifications include details of trading, delivery, base values, maximum order size, tick size, quantity variation, delivery centres, quality criteria, tender periods and due dates
  • Contract expiry date, settlement price, and the delivery logistics are also specified

NCDEX - Chana Futures

  • Additional details on delivery centers, quality specifications, tender period, due date/expiry date, and final settlement price; and delivery logic

Options on Commodity Futures

  • Eligibility criteria based on average daily turnover for agricultural and non-agricultural commodities
  • Futures contracts of a specified month are used in settlement process
  • Exercise style for options is explained as is the minimum/maximum strike pricing

Options on Goods

  • Eligibility criteria, based on exchange trading the futures contracts during the launch day of the option
  • The settlement and delivery of the goods is detailed
  • Various exercise styles are described
  • Minimum/Maximum strike pricing criteria

What is an index futures contract?

  • Index futures contracts facilitate the purchase/sale of an underlying index at a fixed price for future delivery
  • Commodity indices are formed by grouping together individual commodities

Why Index Trading?

  • Index trading is beneficial for risk spreading and benchmarking
  • It can be used to diversify portfolios and gain exposure to commodity sectors

Cost per Lakh of Turnover for Prop. Trading (MCX)

  • Costs and fees are outlined for both futures and options trading, including fees for exchange, GST, stamp duty, and regulatory fees

Cost per Lakh of Turnover for Trading as a Client (MCX)

  • Costs and fees (including fees for exchange, GST, stamp duty, and regulatory fees) are detailed for client trading, broken down into futures and options

Comparison of Indian Contracts with Global Markets

  • Key global market characteristics, including commodities such as gold, silver, aluminum, copper, lead, nickel, and zinc, and their trading volume, are presented

Global Contracts – Chief Characteristics

  • Global commodity contracts specifications, including underlying commodity, exchange, lot size, contract duration, and trading hours

Custodian Role

  • Detailed specifications are presented on the role of custodians
  • Custody, safekeeping, permissions, and obligations are described
  • Insurance aspects, regulatory and audit reporting, and system infrastructure are emphasized

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Related Documents

Commodity Exchanges Lecture 5 & 6 PDF

Description

This quiz examines the key aspects of the Securities Contracts Regulation and its impact on stock exchanges in India. Explore the requirements for recognition, the role of bye-laws, and the dynamics of the commodity derivatives market. Test your knowledge on SEBI's role in ensuring market integrity and protecting investors.

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