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Risk Management Engine of Stock Exchange: 1. Introduction To The Topic

This document discusses the risk management engines of stock exchanges and how they help maintain investor confidence. It outlines objectives like investor protection, fair and efficient markets, and reducing systematic risk. Risk management occurs at the trading, trader, and investor levels through mechanisms like market surveillance, circuit breakers, price bands, and compensation funds. The document also presents a case study analysis of annual reports from stock exchanges to examine growth of compensation funds and analyzes applications of circuit breakers and price bands over the last few years.

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29 views

Risk Management Engine of Stock Exchange: 1. Introduction To The Topic

This document discusses the risk management engines of stock exchanges and how they help maintain investor confidence. It outlines objectives like investor protection, fair and efficient markets, and reducing systematic risk. Risk management occurs at the trading, trader, and investor levels through mechanisms like market surveillance, circuit breakers, price bands, and compensation funds. The document also presents a case study analysis of annual reports from stock exchanges to examine growth of compensation funds and analyzes applications of circuit breakers and price bands over the last few years.

Uploaded by

suvam
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Risk Management Engine of Stock Exchange

(How Does It Enjoy Investor Confidence? – A Study)

1. Introduction to the Topic


1.1 Investment in securities and role of stock exchange
1.2 Confidence of investors. How does securities market define it?
1.3 Investment in securities rest on three set out objectives such as
* Investor Protection;
* Ensuring fair, transparent and efficient market; and
* Reduction of systematic risk

2. Why Risk Management For


2.1 At Trading Level
* Ensuring business continuity
* Smooth and faster settlement of transactions
* Prohibiting insider trading
* Countering high degree volatility
* Countering price rigging
* Combating information asymmetry and market vagaries
* Safer market for investment
2.2 At Trader Level
* Fulfillment of business obligation
* Avoidance of risk of default

2.3 At Investor Level


* Timely receipt of claim
* Protection of interest
* Receipt of legitimate claim against a defaulter
* Redressal of grievance
* Reliance on the market

3. Risk Management Engines of Stock Exchange


3.1 At Trading Level
* Segregation of trading and settlement from each other
* Plan for business continuity and site for disaster management
* Market surveillance
* Circuit Breakers
* Price Band
* Settlement through dematerialized securities
* Settlement/Trade Guarantee Fund (SGF/TGF) to guarantee
settlement of transactions
* Defaults Committee
* Investor Protection Fund to compensate legitimate claims of
investors against a defaulter stock-broker
* Transaction intimation service to investor
* Investor Grievance Committee to redress investor grievance
3.2 Trader’s Requirements of
* Having desired level of net-worth
* Maintenance of Base Minimum Capital (BMC) and Additional
Capital Deposit with Stock Exchange/ Clearing Corporation
* Time to time deposits of various margins with Stock Exchange
* Ensuring compliance of KYC Norms by the clients

4. Usage of Risk Management Weapons


4.1 On Rolling Basis
* Role of Surveillance Department
* Monitoring exposure limit and outstanding positions of brokers
* Applicability of various margins
4.2 As and When Required
* Checking of high degree volatility/ price fluctuations
* Applicability of circuit breakers
* Applicability of price band
* Prevention of insider trading
4.3 In Case of Default
* Guarantee to settlement
* Subsequent action of stock exchange
* Committee to deal with default
* Compensation for legitimate claims of clients of defaulter

5. Investors to Take Care of Risk in Trade


5.1 Contract Note
* Receipt of contract note from the broker in respect of buying or
selling of shares, if any, is very essential.
* It will help an investor to lodge complaint against his broker in
case his claim is not settled.
* It will also help an investor in getting his legitimate claims
against a defaulter stock broker.

5.2 Other Responsibilities


* May or may not execute Power of Attorney (PoA) in favour of
stock broker as this is not mandatory for opening a trading
account or for dealing in shares and securities.
* Ensure PoA is not mis-utilized if it is given in favour of the stock
broker
* Making payment, if any, to the broker only through cheque
* Ensure receiving SMS/ e-mail alerts from the stock exchange in
respect of buying or selling of shares, if any by you
* Ensure receiving SMS/ e-mail alerts from the Depositories in
respect of credit or debit to the Demat A/c. consequent to buying
or selling of shares, if any
* Check the holding status in Demat A/c. regularly
* Ensure settlement of your transactions in time in respect of
buying or selling of shares, if any
* Don’t engage in excess day trading and try to become a long
term investor in right stocks
* Don’t be panic while buying or selling shares and try to select
good stocks for investment
* Be careful in investing in high volatile market

6. Case Study

7. Findings and Conclusion


Case Study/ Data Analysis

1. Collect available Annual Report of NSE and BSE for three years i.e. 2013-14, 2014-
15 and 2015-16 (as Annual Report for 2016-17 may not be available at this stage) to
have the details in the following manner:

Financial Corpus at the Utilization of Purpose of Utilization of Corpus Corpus at the


Year Opening of Corpus during End of the Year
the Year the Year

SGF IPF SGF IPF SGF IPF SGF IPF

2013-14 1. 1.

2014-15 2. 2.

2015-16 3. 3.

Note:

* Make analysis of year-wise size of corpus of SGF and IPF separately and establish the
fact that such size on each case is well enough to serve the needs, if arise relating to
risk management mechanism of stock exchange.

* Also make analysis of year-wise growth rate of corpus of SGF and IPF separately with
source of corpus.

* Make analysis of purpose and background of utilization of corpus, if any.

2. Collect data relating to any circuit breaker applied in the cash market segment of any
stock exchange either by it or by SEBI during last three years. On the basis of data,
please make analysis in the following manner:

2.1 Application of Market-wide circuit breaker

Name of Stock Settlement No. Reason of Frequency Result


Exchange & Date Application of
Application

Note: Make analysis of the above information


2.2 Application of stock-wise circuit breaker

Name of Settlement Name of the Reason of Frequency Result


Stock No. & Date stock Application of
Exchange Application

Note: Make analysis of the above information

3. Collect data relating to price band applied in the cash market segment of any stock
exchange for last one year. On the basis of data, please make analysis in the
following manner:

Daily Name of the Stocks to which Price Band Instance of crossing of Action
Price is applicable (List out 5) Price Band either way Initiated
Band
either BSE NSE BSE NSE
way 1. 1.

2%

5%

10%

20%

Note: Make analysis of the above information.

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