NATIONAL
STOCK EXCHANGE OF INDIA LIMITED
INSPECTION DEPARTMENT
CIRCULAR
Download Ref. No: NSE/INSP/11532
Circular No. NSE/INSP/2008/73 Dated: 23rd
October 2008
To
All Members
Sub: Compliance Hand book
With a view to facilitate easy reference on various
compliance issues, Exchange is releasing handbook on compliance.
We hope the same will serve as a guiding document and help in enhancing compliance level in your organisation. Any
suggestions on improvement on the handbook are welcome.
For
any clarifications, trading members may contact any of the following
officials: Mr. Hansen Cardoza, Mr.
Parameshwaran or Ms. Sania Surve
Direct
No.: 2659 8196
Board Lines: 2659
8100 – 8114 Extn. – 5123 / 5124 / 5128
For National Stock Exchange of
A. Sebastin
Asst.
Vice-President
Inspection
Department
Compliance Handbook
Preamble
Compliance
requirements pertaining to members of the Exchange are given in byelaws,
regulations and circulars of the Exchange and the Clearing Corporation. In order to facilitate quick reference to
such requirements, an attempt has been made to collate them in a single
handbook. This compliance handbook is presented as a guiding document for
carrying out internal compliance checks by members in their head office, branch
offices and offices of sub broker(s)/authorized person(s).
Table of contents
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Contents |
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II. |
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III. |
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IV. |
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V. |
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VI. |
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VII. |
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VIII. |
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IX. |
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X. |
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XI. |
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XII. |
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XIII. |
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XIV. |
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XV. |
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XVI. |
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XVII. |
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XVIII. |
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XIX. |
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XX. |
Compliance
with Prevention of Money Laundering Act (PMLA), 2002 |
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XXI. |
Ø
Client
registration documents are to be executed with any new client before commencing
transactions with the client
Ø
Client
registration documents are to be segregated into mandatory and non-mandatory
parts.
Ø
Know your client
(KYC) form, Member constituent agreement (MCA) and Risk Disclosure document
(RDD) as per the SEBI prescribed formats, constitute
the mandatory part of the registration documents. All additional and voluntary
clauses should be taken in voluntary documents separated from the mandatory
part.
Ø In KYC ensure that
-
complete details
of Client information / Status, Bank and Depository Account details, Financial
details of the constituent, Investment/ Trading experience, References,
Financial documents (for Non Individual Constituents) and Signature of client
are provided
-
Photograph, Proof of identity and address, Board Resolution from
corporate clients permitting trading in derivative products are attached.
-
The segments in which a client wants to transact are selected and marked
by the client clearly
Ø In MCA ensure that
-
In respect of clients registered in other exchange(s) also (if a member
is attached to different exchanges), separate exchange-wise agreement is
executed
-
agreement is printed on a non-judicial stamp paper of appropriate
value and is dated
-
agreement is signed by both the member and the client and is witnessed
-
agreement contains clauses prescribed
by SEBI / NSE from time to time
-
in respect of
clients introduced by sub-broker, tripartite agreement is to be executed
Ø In RDD ensure that
-
Client acknowledges the risk disclosure document and is aware that
certain basic risks are involved in trading in equity and derivative products.
-
Client should be made aware that contracts cannot be rescinded on the
ground of lack of awareness or any other ground
Ø
Conduct in
person verification of individual and HUF clients
Ø Collect PAN card copy of
client, verify the same with the web site of Income tax Department and upload
details of the client before placing orders for the client
Ø
Allot a unique client code to each client and maintain a file mapping the
client codes and the PAN’s.
Ø
Provide copies
of all the executed documents to the clients
Ø
Periodically
update the clients’ financial and other details.
II.
Order Management System and Internal Controls
Ø
Procedures to be
put in place for receipt of orders, recording the same and placing the orders
in the trading system of the Exchange
Ø
Client-wise and
security-wise limits on exposure, open position, etc. to be set up
Ø
Risk mitigation
measures to be documented and made accessible to clients
Ø
Documentation of
internal controls on areas like order modification / cancellation, client code
changes and post-trade activities
Ø
Ensure
monitoring mechanism for client’s debits / obligations and appropriate
collection procedures
Ø
Trading Member
has to ensure that contract notes are issued in the prescribed format within 24
hours of execution of trades on the Exchange.
Ø
To be issued on pre-printed stationary and signed by an Authorised
Signatory mentioning name.
Ø
Unique Client
Code and PAN of the Constituent to be printed.
Ø
With running
serial number (reset to one at the beginning of the Financial Year)
Ø
Dealing office
details and PAN of the Trading Member to be printed
Ø
Trade price and
brokerage to be mentioned separately
Ø
For contract
notes issued with weighted average price for multiple trades resulting from
single order, annexure containing details of all the trades to be provided
Ø
Copies of
contract notes and proof of Delivery /
Despatch to be maintained
IV.
Electronic Contract note (ECN)
Ø
ECNs can be issued only
if specifically consented by client
Ø
ECNs to be digitally
signed, encrypted, non-tamperable and in compliance with provisions of IT Act,
2000.
Ø
Delivery of ECNs
to be made by sending e-mail to the mail id provided by client
Ø
Log reports for
sent mails and rejected / bounced mails to be maintained
Ø
Client to
consent that non-receipt of bounced back mail by trading member amounts to
delivery of contract notes
Ø
ECNs are
required to be simultaneously published on the web-site of trading member and
clients are given secured access to the same by way of client specific logon
and password.
Ø
In case of
non-delivery of ECNs, contract note should be sent in physical form.
Ø
Brokerage rate is subject to a maximum of 2.5% of the transaction amount.
However, in Capital Market segment, trading member can charge brokerage up to
25 paise per share if the market value of the scrip is less than Rs 10/-.
Ø
In case of option contract, brokerage is to be charged on option premium
amount and shall not exceed 2.5% of premium amount or Rs. 100/- per lot
whichever is higher
VI. Quarterly
statement of accounts
Ø
Send statement of accounts for funds and
securities to all the clients in such periodicity not exceeding three
months (calendar quarter) within a month of the expiry of the said period.
Ø
The statements
should have an account of all
receipts and deliveries / payments during the relevant period and not simply,
the details of holdings as at the end of the period
Ø
Maintain proof
of dispatch / delivery for the same.
Ø
An error
reporting clause giving 30 days time is to be incorporated
VII. Banking and demat account operations
Ø
Maintenance of
separate client bank account and constituent beneficiary account for keeping
clients’ funds and securities respectively
Ø
Segregate own and clients’ funds / securities in
separate accounts
Ø
Funds /
securities of clients not to be deposited in own accounts
Ø
No payments
towards expenses / levies can be made from client bank account
Ø
Receipts from /
transfer to third parties, of funds and securities should not be effected in
client bank account and constituent beneficiary account
VIII. Dealing with clients’ funds and securities
Ø
Ensure that
funds / securities are received from respective clients’ accounts only
Ø
Ensure that
pay-out of funds / securities is made to respective clients within one working
day of pay-out by Exchange
Ø
Clients’ funds /
securities are not used for any purpose other than meeting the respective
client’s margin / pay in obligations
Ø
Authorisation
should be obtained from clients for deposit of their collaterals with exchange
/ clearing corporation towards margin
Ø
Clients’
securities should not be pledged to bank / financier for raising funds
Ø
Funds are
received from / paid to clients by way of crossed cheques / demand drafts or by
way of direct credit into the bank account through EFT or any other modes
allowed by RBI only
Ø
Ensure that no
cash dealings are made with clients
Ø Ensure to collect initial
margin and maintenance margin in the approved mode (funds / bank fixed deposits / bank
guarantee / approved securities with appropriate hair cut) from the clients.
Ø Ensure to put in place risk
management system regarding the amount of margin collection and the mode of
collection from other clients in
Capital Market segment
Ø Ensure to collect initial
margin in the approved mode from clients
in F & O segment on an upfront basis
Ø Trading member is required to report margin actually
collected from clients, to NSCCL on a daily basis.
Ø In the computation of margin collection from the clients
for the purpose of reporting to the Exchange,
-
Unencumbered funds received only from the respective clients
on an upfront basis can be included. Any Debit balances in the F&O client
ledger should first be set off by apportioning the free balances / value of
securities and the only balance amount if any should be considered towards
margins collected from clients.
-
Any free balance of the same clients in other segments after considering the
debit balances and margins (if any) applicable in the respective segments can
be considered towards margins for the F&O segment.
-
Margins taken in the form of
securities in the approved list should
be valued as per the closing rate on the previous trading day and not the
trading day, with an appropriate hair-cut.
Ø
Information
related to margin applicable, utilised and required / balance in respect of
each client is to be sent on a daily basis to the respective clients in both
the segments. This information should show break up details in terms of funds,
bank guarantee, bank deposits and securities.
Ø
Ensure
reliability, security and confidentiality of internet trading system
Ø
Client specific
user id and password to be used for execution of trades by the respective
client
Ø
Password policy
to be adhered (secrecy, periodic change and other aspects)
Ø
Internet clients
shall trade through internet trading system and only in case of connectivity
problems, their orders can be entered through back up system (like call and
trade facility) after proper identification of the client
Ø
Ensure that
clients do not deal on behalf of others
Ø
Trading Members
providing internet based trading facility are required to submit SSL
certificate, for year ending June every year.
XI. Other
dealings with clients
Ø
Issue contract
notes for all trades in respect of the constituents introduced by sub-brokers
also
Ø
Have direct
dealings with clients introduced by a sub-broker and ensure that the sub-broker
does not issue any bills / notes to the clients nor deal with the clients’
funds and securities in any manner
Ø
Reconcile dividend account periodically and ensure that dividend received
on behalf of clients is credited to the respective clients within 30 days of
receipt
Ø
Inform all the
constituents if you are engaged in own trading.
Ø
Provide
exclusive e-mail id for registering investor complaints and display the id on
your website and other materials, pamphlets and advertisement campaigns
Ø
Maintain
confidentiality of all client related information
Ø
‘Statement of
Securities Transaction tax’ to be issued on an annual (financial year) basis
within one month from the close of the financial year, unless required by the
clients otherwise as to receive the STT
statement on a daily basis.
XII. Dealing
with intermediaries
Ø
Deal directly with clients, registered
sub broker in CM segment and authorised person in F&O segment
Ø
Inspect at
least 10% of branches and sub-brokers every year and ensure that each branches
and sub-broker are inspected at least once in every five years.
Ø
Ensure that you
do not act through or on behalf
of another trading member / sub-broker of the Exchange either for proprietary
trading or for trading on behalf of clients without prior approval of the
Exchange.
Ø
Ensure that you
deal with only one broker of another stock exchange for own transactions with
prior intimation to the Exchange
Ø
Ensure that
dealings on behalf of constituents, through a broker of another stock exchange
are done only after necessary registration as a sub-broker.
Ø
In F&O
segment, dealings with approved authorized persons may be done only if they are
also registered as sub brokers in the Capital Market segment of the Exchange
XIII. Location and Operation of Terminals
Ø
Ensure that
trading terminals are not located at any place other than the main / branch
office and the offices of registered sub brokers / authorised persons of the
member.
Ø
Ensure that
trading terminal is not operated by a person other than an approved user /
approved person
Ø
Ensure that all
terminal operators in F & O segment are NCFM / BDCE qualified and that at
least one of every 5 Capital Market terminal operators in a location is NCFM
qualified
Ø
Ensure that no NEAT terminals are
extended to another location without the approval of the Exchange
Ø
Upload details
of all CTCL terminals to the Exchange prior to their activation. Any change in
the details viz. terminal id, user, location, etc. also needs to be uploaded
prior to such change.
Ø
Ensure that
secrecy of terminal-wise logon and password is maintained
Ø
Trading Members
are required to undertake system audit on annual basis, for period ending 30th
June, of all the branches where CTCL or Internet Based Trading facility
is provided and submit one consolidated report thereof to the Exchange within
one month from end of the period
Ø Ensure to place orders on
own account using ‘PRO’ code only and through trading terminals authorised for
such purpose
XIV. Display of Notice Board /
SEBI registration certificate
Ø
Trading Members
shall display, in all their offices / offices of their registered sub brokers
where trading terminals are located, notice boards/plates at prominently
visible locations, painted / printed in a permanent manner, in a font and
colour which enables easy reading of the subject matter and containing
prescribed details.
Ø
Display copy of
SEBI registration certificate in the above said offices.
XV. Control over branches and sub brokers
Ø
Ensure due diligence and credentials of entities proposed to
be appointed as sub brokers/authorized persons.
Ø
Ensure proper procedures while opening and closing branches
Ø
Ensure that clients are informed in advance in case of
closure of branch
Ø
Ensure that branches, sub-brokers, authorised persons do not
indulge in unauthorised trading activities.
Ø
Monitor the activities of sub brokers/relationship
managers/officials in-charge of branches to avoid unregistered intermediation,
fraudulent activities, misuse of clients’ accounts, etc.
Ø
Ensure proper procedure for accounting of demand drafts and
pay orders received from clients in the respective clients’ accounts.
Ø
Obtain and analyse periodic reports and information from all
branches/sub brokers, to address various risk areas.
Ø
Take feedback from the clients of sub brokers and branches
on their dealings with the sub brokers and
branch officials
Ø
Inspect at
least 10% of branches and sub brokers every year and ensure that each branch
and sub broker is inspected at least once in every five years.
Ø Before releasing any advertisement
for business promotion, a copy of the advertisement has to be submitted to the
Exchange at least seven days in advance and written permission of the Exchange
is to be obtained before the advertisement is published
Ø Ensure
to abide by the code of advertisement given by the Exchange
XVII. Maintenance of Records
Ø
Maintain separate books
of accounts and records for trades executed on each recognised stock exchange (in case of membership in different
exchanges)
Ø
Maintain records
and registers relating to business for a period of five years either in hard
form or non tamperable soft form, including the following
-
Statements of funds and
securities obligations received from NSCCL
-
Client ledger, Margin
register, Register of complaints
-
Records in respect of
brokerage collected separately from constituents
-
Register of
transactions
-
Register or Ledger
Account of Securities, client wise and security wise
XVIII. Continued membership requirements
Ø
Trading Member
should obtain prior permission of Exchange and SEBI before effecting any change
in shareholding / sharing pattern or change in directors / partners.
Ø
Any change in
name of the trading member must be intimated to the Exchange forthwith along
with the necessary records, for the purpose of effecting the change in the SEBI
registration certificate
Ø
Net worth of a
trading member shall always be maintained above the prescribed minimum of Rs 1
crore in case of corporates and Rs 75 lakhs in case of non-corporates.
Ø
Details of
Compliance Officer and any changes thereof to be intimated to the Exchange
XIX. Due diligence in employee activities
Ø
Trading Member
shall establish and enforce procedures to supervise its business and the
activities of its employees that are reasonably designed to achieve compliance
with all the relevant regulatory requirements.
Ø
Trading Member
shall specifically authorise in writing persons, who may be authorised to
transact on behalf of the member and do such acts which the member delegates to
such persons
XX. Compliance with Prevention of Money Laundering Act (PMLA), 2002
Ø
Appointment of
and change in Principal Officer to be intimated to the Financial Intelligence
Unit, India (FIU)
Ø
Written
procedure for compliance with PMLA to be adopted.
Ø
Adopt customer
acceptance policies and procedures sensitive to the risk of money laundering or
terrorist financing transactions
Ø
Strictly adhere
to customer due diligence requirements from establishment of new account to
transaction monitoring and report suspicious transactions, if any, to the FIU
Ø
Organise
suitable training programmes for employees and ensure awareness
XXI. Compliance Calendar
Ø
A consolidated checklist of reports
/ statements / certificates / data / submissions
to be made by members to the Exchange / NSCCL is available in our consolidated
circular no. NSE/INSP/2008/72 dated 18th September 2008. It
is also available in our website www.nseindia.com
>members>compliance for members>compliance calendar.
Disclaimer:-
This
Compliance hand book contains an illustrative but not an exhaustive list of
compliance requirements which members are required to adhere to. While every
effort has been made to include all the relevant compliance requirements, for
the sake of complete information, members may refer to the relevant Rules,
Byelaws, Regulations or Circulars in addition to this hand book.