Pre-trade Risk Controls





All Stock Exchanges.

Dear Sir / Madam,

December 13, 2012

Sub: Pre-trade Risk Controls 

1.  SEBI has issued various circulars from time to time to implement risk management in cash market and equity derivatives segments. Stock  exchanges have operationalised these measures by putting in place checks to be carried out at their end and by the stock brokers.

2.  The recent incidents of erroneous orders have brought to fore certain areas that require additional risk control measures to mitigate disruption of trading at the exchanges.

3.  In view of the above, SEBI engaged in a consultative process with the market  participants,  stock  exchanges,  its  Risk  Management  Review Committee (RMRC) and Technical Advisory Committee (TAC). Global practices in this regard were also studied.

4.  Pursuant to the above, it has been decided to prescribe a framework of dynamic  trade  based  price  checks  to  prevent  aberrant  orders  or uncontrolled trades. These measures would be implemented in phases in order to ensure the Indian stock exchanges deploy latest technology while maintaining adequate controls. As an initial measure, it has been decided that stock exchanges shall implement the measures as given below.

Order-level checks

5.  Minimum pre-trade risk controls for all categories of orders placed on Stocks, Exchange Traded Funds (ETFs), Index Futures and Stock futures shall be as follows:

5.1. Value/Quantity Limit per order:

(a) Any order with value exceeding Rs. 10 crore per order shall not be accepted by the stock exchange for execution in the normal

(b) In addition, stock exchange shall ensure that appropriate checks for value and / or quantity are implemented by the stock brokers      based on the respective risk profile of their clients.

5.2. Cumulative limit on value of unexecuted orders of a stock broker:

(a) Vide SEBI circular CIR/MRD/DP/09/2012 dated March 30, 2012, stock exchanges have been directed to ensure that the trading algorithms of the stock brokers have a ˜client level cumulative open order value check™.

(b) In continuation to the above, stock exchange are directed to ensure that stock brokers put-in place a mechanism to limit the cumulative  value  of  all  unexecuted  orders  placed  from  their terminals to below a threshold limit set by the stock brokers. Stock exchanges shall ensure that such limits are effective.

5.3. Stock exchanges shall enhance monitoring of the operating controls of  the  stock  brokers  to  ensure  implementation  of  the  checks mentioned at point 5.1(b) and 5.2(b) above; and  levy  deterrent penalty in case any failure is observed at the end of stockbroker in implementing such checks.

Dynamic Price Bands (earlier called Dummy Filters or Operating Range)

6.    Vide circular no. SMDRPD/Policy/Cir-37/2001 dated June 28, 2001, stock exchanges had been advised to implement appropriate individual scrip wise price bands in either direction, for all scrips in the compulsory rolling settlement  except  for  the  scrips  on  which  derivatives  products  are available or scrips included in indices on which derivatives products are available.

For  scrips  excluded  from  the  requirement  of  price  bands,  stock exchanges have implemented a mechanism of dynamic price bands (commonly known as dummy filters or operating range) which prevents acceptance of orders for execution that are placed beyond the price limits set by the stock exchanges. Such dynamic price bands are relaxed by the stock exchanges as and when a market-wide trend is observed in either direction.

6.1  It has been decided to tighten the initial price threshold of the dynamic price bands. Stock exchange shall set the dynamic price bands  at 10%  of  the  previous  closing  price  for  the  following securities:

(a)  Stocks on which derivatives products are available,

(b)  Stocks included in indices on which derivatives products are available,

(c)  Index futures,

(d)  Stock futures.

6.2  Further, in the event of a market trend in either direction, the dynamic price bands shall be relaxed by the stock exchanges in
increments of 5%. Stock exchanges shall frame suitable rules with mutual consultation for such relaxation of dynamic price bands and shall make it known to the market.

Risk Reduction Mode

7     Stock exchanges shall ensure that the stock brokers are mandatorily put in risk-reduction mode when 90% of the stock broker™s collateral available for adjustment against margins gets utilized on account of trades that fall under a margin system. Such risk reduction mode shall include the following:

(a)  All unexecuted orders shall be cancelled once stock broker breaches 90% collateral utilization level.

(b)  Only orders with Immediate or Cancel attribute shall be permitted in this mode.

(c)  All new orders shall be checked for sufficiency of margins.

(d)  Non-margined orders shall not be accepted from the stock broker in risk reduction mode.

(e)  The  stock  broker  shall  be  moved  back  to  the  normal  risk management mode as and when the collateral of the stock broker is
lower than 90% utilization level.

8     Stock exchanges may prescribe more stringent norms based on their assessment, if desired.

9    Stock exchanges are directed to:

(a)  take necessary steps to put in place systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules and regulations, within one month from the issuance of the circular and with atleast one week advance notice to the market;

(b)  bring the provisions of this circular to the notice of the stock brokers and also disseminate the same on its website;

(c)  communicate to SEBI the status of implementation of the provisions of this circular.

10  This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect  the  interests  of  investors  in  securities  and  to  promote  the development of, and to regulate the securities market.

Yours faithfully,

Maninder Cheema

Deputy General Manager


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