26 July 2011 Overview of Compliance v o

Compliance requirements p q

Compliancemeansensuringconformityandadherencetoregulatoryacts,rules, procedures,laws,regulations,directivesandcirculars. procedures laws regulations directives and circulars CompliancerequirementbroadlyflowfromtherelevantprovisionsofSCRA g g 1956;SCRR1957,SEBIAct,Rules,RegulationandCirculars,Rules,Regulations, Byelaws&CircularsofNSEIL&NSCCL

Compliance V/s Business Dilemma

Benefits of Compliance f f p

BusinessContinuity Compliance&RiskManagement(lessrisk,lessbaddebts) p g ( , ) Compliance&Growth(introductionofnewproducts) Compliance&Credibility(clientconfidence) Reputation&Goodwill(inthemarketplace&withregulators) HealthyFinancials betterliquidity RobustInternalcontrols b l l Compliance&Peaceofmind

Compliance and Regulatory Requirements R i t

RequirementstobeadequateneitherExcessivenorInadequate Exchangemonitorslevelofcompliancebyanalyzingdata/Information/ submissionsavailablewiththeExchange Data/Information/recordsavailableatmembersofficesverifiedduring Data/ Information/records available at members offices verified during theInspection Inspectionaregulatoryrequirements&atooltomonitorlevelof compliance l Inspectionstoberiskbased,swift&valueadding InternalAuditreportrequirements Internal Audit report requirements

Commonly f y found Observations

Observationsarebroadlycategorizedintothefollowingareas

Client Registration

Trading Terminals

Provisions of PMLA

Margin Reporting

Dealings with Clients

Client Registration

o o o o o o o o o o o

Non Execution of documents KYC /MCA / RDD, Incomplete Documents/no / , p / separate dockets Contradictory clauses in voluntary or mandatory documents/ Jurisdiction Inperson verification not done Non Collection of documents/details like address/identity/PAN/ Bank/ DP Non delivery of set of documents executed to clients Non compliance of requirements as per December 03, 2009 circular of SEBI Index page not maintained Clients countersign against the segment/exchange in KYC not obtained Identity & address of the introducer not captured in KYC Details of action taken against a client not obtained Financial information & supporting documentary evidence not obtained Updation of financial information and periodic reviews not done

Provisions of PMLA f

Account opening p A nt p nin procedure- Anti M n d Money L nd in Laundering Requirements

Client Due Diligence

Client Identification procedure

Policy for acceptance of clients & risk based approach

Classification of Clients of special Cli f i l category (CSC)

Provisions of PMLA (Cont)

Verifytheclientidentityusingreliable,independentsources,documents,data o orinformation. o a o Verifytheidentityofbeneficialowneroftheclientand/orthepersonon whosebehalftransactionsaretobeconductedandobtainsufficientdetails Ensurethatnoaccountisopenedinafictitious/benaminameorwherethe intermediaryisunabletoapplyappropriateCDDmeasures/KYCpolicies Classifytheclientsintolow,mediumandhighriskcategorybasedonrisk Classify the clients into low medium and high risk category based on risk perception ClientsofspecialcategorylikeNRI,HNI,Trust,NGO,PEP,Nonfacetofaceetc.to beclassifiedashighriskclientsandcloselymonitored b l f d h h k l d l l d Clienttransactionsnottobedisproportionatetotheirfinancialstrength IdentifysuspicioustransactionsandfileSTRwhereverrequired Identify suspicious transactions and file STR wherever required Theidentityrecordsofclientstobepreservedforaperiodof10yearsfrom thedateofcessationofthetransactionsbetweentheclientandintermediary

o o o

Dealings with Clients ( g (Cont...) )

RUNNING ACCOUNT AUTHORIZATION
o

Runningaccountauthorizationisvoluntaryatclientsdiscretion Authorizationshallbedatedandcontainaclause,statingthatclientcan g revokeauthorizationatanytime. Authorizationshallbesignedbytheclientonly&notbyanyPOAholder. Authorization shall be signed by the client only & not by any POA holder. Ifamemberhasobtainedsuchauthorizationfromtheclient,themember needstointimateclientsintheperiodicalstatementofaccountsthat the needs to intimate clients in the periodical statement of accounts that the authorizationshallcontinuetillthesameisrevokedbytheclient

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Dealings with Clients g

SETTLEMENT OF FUNDS &SECURITIES

Incaseofrunningaccountcompulsorysettlementtobedoneon monthly/quarterlybasisasperclientpreference,acrossthesegments Retentionoffundsandsecuritiesatthetimeofsettlementmaybeasunder

Derivativemarket

tradingmembermayretainupto175%ofmarginrequirement

Capitalmarket tradingmembermayretainentireoutstandingpayinobligation offunds&securitiesandvalueoftransactionsexecutedonthedayofsettlement.

o o o

Nointerclientadjustmentforthepurposeofsettlement j p p Issuestatementoffunds&securitiesalongwithretentiondetails Passcorporatebenefitslikerights,bonus,dividendetctorespectiveclients

Dealings with Clients (Cont...)

COMPLIANCES RELATED TO POA

APOAisvoluntaryandatclientssolediscretion A POA i l t d t li t l di ti ShallnotgiveanyexclusiverightorcontrolovertheDPaccountorledger accountorbankaccountofclient POAshouldbeusedforthepurposespermittedbySEBI POAshouldnotpermit Transferofsecuritiesforoffmarkettrades OpeningatradingorDPaccountinthenameofclient Execute trades in the name of the client without itsconsent Executetradesinthenameoftheclientwithoutitsconsent ProhibitissueofDeliveryInstructionSlipstoclient. () p g Prohibitclient(s)fromoperatingtheaccount Allowmergingofbalances(dues)undervariousaccounts

Margin Reporting

Margin Reporting ( g p g (Cont...) )

COLLECTION OF MARGINS

o o

Marginsareanimportantelementoftheriskmanagementsystem Membersshouldhaveaprudentsystemofriskmanagementtoprotect M b h ld h d t t f ik tt t t themselvesfromclientdefault. Thesameshallbewelldocumentedandbemadeaccessibletotheclients andtheStockExchanges. d h k h Inthecashsegmentthequantumofthesemarginsandtheformandmode ofcollectionarelefttothediscretionofthemembers

Margin Reporting (Cont...)

COLLECTION OF MARGINS DERIVATIVES SEGMENT
o

o o

o o

In the Derivatives segment members are required to collect and report details of upfront margins collected from all their Clients Trading member can report client margin details to clearing corporation upto T+2 day Non reporting is considered as 100 % shortfall Margins should be available with the member and should be in approved forms only (Liquid securities / free funds) Penalty would be imposed in case of shortfall or wrong reporting In case of non receipt of payin of funds/ securities beyond a reasonable time gap, not desirable to allow further positions Exposure allowed E pos re allo ed to clients sho ld be in proportion to margins and should financial strength

Trading Terminals

o o o o

o o o

To be located only in the office of the Trading Member / subbroker / sub broker authorised persons offices No extension of NEAT terminal without prior approval of the Exchange. To b operated b approved persons only. be d by d l Upload trading terminal details to the Exchange before activation. All information to be correctly uploaded in the prescribed format particularly user name, location and terminal id. Any change in the details to be immediately updated in Exchange records. PRO t di t b d trading to be done only f l from t di t trading terminals enabled f PRO t di i l bl d for trading Trading terminals in the CM/ F&O/Currency segment to be operated by users having valid certifications only.

Other Observations / Bad practices

Misutilizationofclientfunds/securitiesfortheuseofself/otherclients Executionoftradesofmultipleclientsinthesamecodeandtransferofsame Execution of trades of multiple clients in the same code and transfer of same inthebackofficetodifferentclientsaccounts Modificationofclienttradesandtransferprofitabletradestorelatedentities Fundingtoclientsbyself/throughNBFC Funding to clients by self/ through NBFC Consideringchequesnotdeposited/heldinhandforsubstantialperiodswhile reportingmarginstotheexchange Unexplaineduseoffundsraisedbypledgeofclientsecurities U l i d ff d i db l d f li t iti Unauthorizedtradesinclientsaccounts Surveillance/Risk/Backofficefunctionsnotsegregatedleadingtofraud AcceptanceofCash/DD/payorderandcredittootherclientaccounts Offeringfixreturns/creationofemailIDsofclients

New Regulatory Requirements

PREFUNDEDINSTRUMENTS

In case of payment received through prefunded instruments, like, Pay Order, Demand Draft, Bankers cheque etc. members need to ensure that the funds are not received from third parties. If the value of prefunded instruments is Rs. 50,000/ or more, per day per client, the stock brokers may accept the instruments only if the same are accompanied by proofs like

Certificatefromtheissuingbankonitsletterheadoronaplainpaperwiththeseal Certificate from the issuing bank on its letterhead or on a plain paper with the seal oftheissuingbank. Certifiedcopyoftherequisitionslip(portionwhichisretainedbythebank)toissue theinstrument. Certifiedcopyofthepassbook/bankstatementfortheaccountdebitedtoissuethe instrument. Authenticationofthebankaccountnumberdebitedandnameoftheaccountholder bytheissuingbankonthereverseoftheinstrument. y g f

Members should also maintain an audit trail of the funds received through electronic fund transfers to ensure that the funds are received from their clients only.

New Regulatory Requirements (Cont...) (Cont )

RESPONSIBILITY OF COMPLIANCE OFFICERS
o o o

Keep check on Type of Investor complaints received To report Arrest / conviction of key officials o epo es co c o o ey o c a s Report activities carried out, if any, in any business other than that of securities. To report if Membership to the stock Broker or Group Company is refused by any Regulator To Report regulatory action on Stock Broker or Group Company Technology failure at Stock broker entity impacting servicing of more than 25% of its customers. Financial disputes before various Government organization / bodies created under Act of Parliament involving a value of more than 25%, on cumulative bas s, o e e o o e S oc basis, of the Networth of the Stock Broking entity o ge y Any other important event

o o

New Regulatory Requirements (Cont...) (Cont )

ONLINE CLIENT CODE MODIFICATION
o o

Client Code Modification for Non institutional clients to be fined at SEBI prescribed rates Fine levied to be 1% or 2% of the value of trades modified during a month as may be applicable Avoid back office transfer of trades

NISMCERTIFICATION FOR PERSONS DEALING WITH CLIENTS S O O SO S G C S

o

All persons associated with stock brokers need to get Certified if they are involved with or deal with any of the following
Assets / funds of clients or Redressal of Invertor grievance or activities having bearing on operational risk

All employees of trading member should be certified as under

New employees within 1 year from date of circular Existing employees should obtain certification within 2 years

NEW REGULATORY REQUIREMENTS (CONT...) )

MARKET RUMORS

Stock broker should have proper systems to ensure that

Employees/temporarystaff/voluntaryworkersetc.donotencourageor l / ff / l k d circulaterumorsorunverifiedinformation AccesstoBlogs/Chatforums/Messengersitesetc.shouldeitherbe restrictedundersupervisionoraccessshouldnotbeallowed LogsforanyusageofsuchBlogs/Chatforums/Messengersites(calledbyany nomenclature)shouldbemaintainedbymembers ) y Employeesshouldbedirectedthatanymarketrelatednewsreceivedby themeitherintheirofficialmail/personalmail/blogorinanyother mannershouldbeforwardedonlyafterthesamehasbeenseenand manner should be forwarded only after the same has been seen and approvedbytheComplianceOfficer

Regulatory Initiatives

IssueofFAQonDealingsbyNRIs Reviewofdetailsincludedincompliancecalendar/handbook/ fd l l d d l l d /h db k/ consolidatedcircularwithreferencetorecentcirculars Memberseducationoncompliancerequirements Conductingcompliancevisitsforcreatingawarenessamongnewmembers Initiatedreviewofclientregistrationdocumentstomakethesamecost effectiveanduserfriendly ClarificationsregardingPowerofAttorneysobtainedfromclientsoftrading members Clarificationsregardingprefundedinstruments Clarificationregardingundertakingforrunningaccountmaintenance

THANK YOU

QUESTIONS ???