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TMI BlogMaster Circular for Commodity Derivatives MarketX X X X Extracts X X X X X X X X Extracts X X X X ..... ........................................................ 6 1.1. Timelines for Compliance with various provisions of Securities Laws by Commodity Derivatives Exchanges........................................ 6 1.2. Monthly Development Report for Commodity Derivative Exchanges ......... 9 1.3. Mandatory requirements / exit policy for Commodity Derivatives Exchanges .................................................... 10 Chapter 2. Trading ........................................................................................ 13 2.1. Trading Hours/Trading Holidays on Commodity Derivatives Exchanges . 13 2.2. Transaction Charges by Commodity Derivatives Exchanges .................... 14 2.3. Spot Price Polling Mechanism ..................................................................... 15 2.4. Criteria for Eligibility, Retention and re-introduction of derivative contracts on Commodities.................................................... 17 2.5. Unique Client Code (UCC) and Mandatory Requirement of Permanent Account Number (PAN) ..................................................... 20 2.6. Modification of Client Codes Post Execution of Trades on National and Regional Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Group of WSP ... 54 3.3. Financial Norms for the WSP ....................................................................... 54 3.4. Fit and Proper Criteria .................................................................................. 57 3.5. Corporate Governance norms for WSP ....................................................... 57 3.6. Know Your Depositor.................................................................................... 59 3.7. PAN requirement ........................................................................................... 60 3.8. Facilities & Infrastructure Requirement for WSP ........................................ 60 3.9. Accreditation of Assayers ............................................................................ 63 3.10. Warehouses at delivery centres ................................................................... 64 3.11. Insurance ....................................................................................................... 64 3.12. Monitoring/Inspection/Audit of warehouses by WSPs and Exchanges .... 64 3.13. Review of WSPs/Warehouses ...................................................................... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2. Investor Service Fund (ISF) ........................................................................ 103 Chapter 8. Investor Grievance Redressal System and Arbitration Mechanism 106 8.1. Investor Grievance Redressal System ...................................................... 106 8.2. Arbitration Mechanism at Commodity Derivatives Exchanges ............... 111 Chapter 9. Trading Software and Technology ......................................... 124 9.1. Annual System Audit .................................................................................. 124 9.2. Business Continuity Plan (BCP) and Disaster Recovery (DR) ................. 129 9.3. Annual System Audit of Stock Brokers / Trading Members of National Commodity Derivatives Exchanges...................................................... 131 9.4. Testing of software used in or related to Trading and Risk Management.................................................................................. 132 9.5. Cyber Security and Cyber Resilience framework ..................................... 137 Annexures ....................................................................................................... 139 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Laws by Commodity Derivatives Exchanges SEBI Circular No CIR/CDMRD/DEA/03/2015, dated November 26, 2015 1.1.1. Commodity derivatives exchanges shall comply with the provisions of SCRA, applicable provisions of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012, ('SECC Regulations') and SEBI circular CIR/MRD/DSA/33/2012 dated December 13, 2012, on procedural norms on recognition, ownership and Governance for Stock Exchanges and Clearing Corporation ('SECC Circular'). 1.1.2. The timelines prescribed herein, for compliance with various provisions of Securities Laws shall be reckoned from September 28, 2015. 1.1.3. Clearing and Settlement: Commodity derivatives exchanges shall transfer the functions of clearing and settlement of trade to a separate clearing corporation within three years. Till then, the exchanges may continue with the existing arrangement for clearing and settlement of trades. 1.1.4. Validity of recognition of Commodity Derivative Exchanges: Validity of recognition of commodity derivatives exchanges under SCRA shall be taken to be the same as the validity of their recognition under FCRA. Further, the renewal of recogni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments on the governing boards of national commodity derivatives exchanges shall be governed by the provisions of SECC Regulations and SECC Circular. II. National Commodity Derivatives Exchanges shall comply with the provisions of Regulation 27 of SECC Regulations 1.1.9. Segregation of Regulatory Departments: Commodity derivatives exchanges shall segregate their regulatory departments (as indicated in SECC Circular) from other departments in the manner specified in Part C of Schedule II of SECC Regulations. 1.1.10. Oversight Committees: Commodity derivative exchanges shall comply with the requirements of Regulation 29 read with Regulation 44D (1) (b) of SECC Regulations. National commodity derivatives exchanges shall constitute an oversight committee for 'Product design', chaired by a Public Interest Director. 1.1.11. Advisory Committee and other Statutory Committees: National commodity derivatives exchanges shall constitute Advisory committees in line with Regulation 30 of SECC Regulations, 2012 and statutory committees as specified in SECC Circular. 1.1.12. Risk Management Committee: Till the functions of clearing and settlement are transferred to a separate clearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Commodity Derivative Exchanges are advised to submit a Monthly Development Report as per the prescribed format to SEBI by 7th of the succeeding month. 1.2.2. The format for the Monthly Report is provided at Annexure B. 1.3. Mandatory requirements / exit policy for Commodity Derivatives Exchanges SEBI Circular No. CIR/CDMRD/DEA/01/2016, dated January 11, 2016 1.3.1. If there is no trading operation on the platform of any commodity derivatives exchanges for more than twelve months then such exchange shall be liable to exit. 1.3.2. In addition to the above, henceforth, all National Commodity Derivative Exchanges shall continuously meet the turnover criteria of ₹ 1000 crores per annum. The Regional Commodity Exchanges shall ensure that they have at least 5% of the nation-wide market share of the commodity, which is principally traded on their platform. In case the National and Regional Commodity Exchanges fail to meet the above criteria for 2 consecutive years, they shall be liable to exit. 1.3.3. In the event a recognized commodity derivatives exchange, for any reason suspends its trading operations, it shall resume its trading only after ensuring that adequate and eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the exchange. D. The exchange will be liable to make good any shortfall in collection of dues of the brokers to SEBI. V. Other Conditions A. In case any commodity derivatives exchange, after de-recognition, continues as corporate entity under the Companies Act, 2013, it shall not use the expression 'stock exchange', 'commodity derivative exchange' or 'exchange' or any variant in its name or in its subsidiaries name so as to avoid any representation of present or past affiliation with the exchange. B. The Sale / distribution / transfer of assets / winding up of such exchanges / companies shall be subject to the applicable laws in force. C. The concerned commodity derivatives exchange shall set aside sufficient funds in order to provide for settlement of any claims, pertaining to pending arbitration cases, arbitration awards, not implemented, if any, liabilities/claims of contingent nature, if any, and unresolved investors complaints/ grievances lying with the exchange. D. In case of de-recognition and exit, the stock exchange shall contribute up to 20% of its assets (after tax) towards SEBI Investor Protection and Education Fund (IPEF) for investor protection and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be followed every year irrespective of the holidays falling on a working day or a non-working day in that year. 2.2. Transaction Charges by Commodity Derivatives Exchanges SEBI Circular no SEBI/HO/CDMRD/DMP/CIR/P/2016/82 dated September 07, 2016 2.2.1. The Commodity Derivatives Exchanges are collecting transaction charges from the members for the trades executed on their trading platform. In order to promote competition in the market and bring in greater efficiencies and lower transaction costs to market participants, it has been decided that the following norms shall be continued to be applicable to the Commodity Derivatives Exchanges while levying transaction charges- I. The Exchanges can levy different transaction charges for different commodities' contracts and even in the case of contracts of the same commodity. II. The Exchanges will ensure that the ratio between highest to lowest transaction charges in the turnover slab of any contract is not more than 2:1. Revised via SEBI circular no SEBI/HO/CDMRD/DMP/CIR/P/2018/1 dated January 03, 2018 III. In the slab system the concessional transactional charges shall be charged only on the incremental volume/turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Participants Location Profession Price quoted Time, Date A1 A2 A. The Exchanges may assign a code such A1, A2, A3…etc. for poling participants of a particular contract and reveal his location and price (s) for the day. B. This information shall be updated on Exchange website every day for every contract traded on the exchange platform. C. The information shall continue to be displayed even after the expiry of the contract for a period of 3 years. IV. endeavour in increasing the sample size used for fixing the daily spot prices during the last 15 days of the contract. V. review on a monthly basis the prices polled by the participants to identify participants habitually polling unrealistic prices. These participants could be put under watch and subsequently removed from the panel if such instances reoccur despite appropriate communications. VI. provide a separate feedback window for receiving complaints in this regard. The exchanges shall address such complaints in a time-bound manner. Further the exchanges shall keep the audit trail of all such complaints received and the steps taken for rederssal. 2.4. Criteria for Eligibility, Retention and re-introduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orage, which creates opportunity for cash and carry and hence would attract arbitragers thus make it more suitable for derivatives trading. B. Trade Factors i. Global: Global market in a commodity could be a positive indicator as internationally linked commodity prices are influenced by various global factors and thus create multiple reference points for price discovery which may make it conducive for derivatives trading. ii. Value chain: The term ''value chain'' describes the full range of value adding activities required to bring a product or service through the different phases of production, including procurement of raw materials and other inputs", connected along a chain of producing, transforming and bringing goods and services to end-consumers through a sequenced set of activities and a strategic network among a number of business organizations". Larger is the value chain larger would be the number of participants interested in derivatives trading of such commodity. iii. Geographical coverage: The commodity should ideally have a vast distribution across the country. The coverage can be in the form of production of commodity or the distribution of the commodity across ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of 3 months. 2.4.5. Criteria for retention and reintroduction of derivative contracts on commodities I. For any commodity to continue to be eligible for Futures trading on Exchange, it should have annual turnover of more than ₹ 500 Crore across all National Commodity Derivatives Exchanges in at least one of the last three financial years. For validating this criteria, gestation period of three years is provided for commodities from the launch date/re-launch date, as may be applicable. II. Once, a commodity becomes ineligible for derivatives trading due to not satisfying the retention criteria, the exchanges shall not reconsider such commodity for re-launching contract for a minimum period of one year. III. Further, a commodity which is discontinued/suspended by the exchange from derivatives trading on its platform, shall not be re-considered by the concerned exchange for re-launching of derivatives contract on such commodity at least for a minimum period of one year. 2.5. Unique Client Code (UCC) and Mandatory Requirement of Permanent Account Number (PAN) SEBI Circular No SEBI/HO/CDMRD/DMP/CIR/P/2016/87 dated September 16, 2016 2.5.1. It shall be mandatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e penalty so collected by the Commodity Derivatives Exchanges shall be transferred to the Investor protection Fund (IPF).Further, if the client details are not uploaded within a month of the trade, the member is liable to be suspended. 2.5.6. The commodity exchanges shall be required to maintain a database of client details submitted by members. Historical records of all such submissions shall be maintained for a period of 7 years by the Exchanges. 2.6. Modification of Client Codes Post Execution of Trades on National and Regional Commodity Derivatives ExchangesSEBI Circular no SEBI/HO/CDMRD/DMP/CIR/P/2016/73 dated August 19, 2016 2.6.1. Exchanges may allow modifications of client codes of non-institutional trades only to rectify a genuine error in entry of client code at the time of placing/ modifying the related order in all segments. It is also re-emphasized here that this facility is expected to be used more as an exception rather than a routine. SEBI Circular No SEBI/HO/CDMRD/DMP/CIR/P/2016/43 dated March 29, 2016 2.6.2. For this purpose the following shall be classified as genuine errors: I. Error due to communication and / or punching or typing such that the original c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive penalty for a client code modification where broker is able to produce evidence to the satisfaction of the exchange to establish that the modification was on account of a genuine error. However, not more than one such waiver per quarter may be given to a broker for modification in a client code Explanation: If penalty wavier has been given with regard to a genuine client code modification from client code AB to client code BA, no more penalty waivers shall be allowed to the stock broker in the quarter for modifications related to client codes AB and BA II. Exchanges shall submit a report to SEBI every quarter regarding all such client code modifications where penalties have been waived. 2.6.6. SEBI shall examine the implementation of above mentioned norms during the inspection of stock Exchange. SEBI Circular No SEBI/HO/CDMRD/DMP/CIR/P/2016/43 dated March 29, 2016 2.7. Daily Price Limit for Agricultural and Non-Agricultural Commodity Derivatives 2.7.1. Agricultural commodity derivativesSEBI circular no CIR/CDMRD/DMP/2/2016 dated January 15, 2016 I. The following daily price limits have been decided upon: Commodity Initial Slab Enhanced Slab Total DPL Barley, Chill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EBI/HO/CDMRD/DMP/CIR/P/2016/83 dated September 07, 2016 I. For fixing DPL slabs, base price shall be taken as previous day's closing price of the contract, however for the first trading day (launch day) of each contract, Exchange shall determine base price as under : A. Volume Weighted Average Price (VWAP) of the first half an hour, subject to minimum of ten trades B. If sufficient No. of trades are not executed during the first half an hour, then the VWAP of first one hour trade subject to minimum of ten trades. C. If sufficient No. of trades are not executed even during the first hour of the day then VWAP of the first ten trades during the day D. The base price arrived as per (A) or (B) or (C) above, as the case may be, shall be calculated by the Exchange and shall be used to determine DPL for the remaining part of the day 2.7.4. For any commodity derivatives, exchanges at their discretion may prescribe DPL narrower than the slabs prescribed by SEBI in case they require so based upon their analysis of price movements and their surveillance findings. 2.8. Suspension of Forward Segment SEBI circular no CIR/CDMRD/DMP/2/2016 dated January 15, 2016 2.8.1. It has been deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n series having strike prices immediately above this ATM strike and two option series having strike prices immediately below this ATM strike shall be referred as 'Close to the money' (CTM) option series. In case the DSP is exactly midway between two strike prices, then immediate two option series having strike prices just above DSP and immediate two option series having strike prices just below DSP shall be referred as 'Close to the money' (CTM) option series. B. All option contracts belonging to 'CTM' option series shall be exercised only on 'explicit instruction' for exercise by the long position holders of such contracts. C. All In the money (ITM) option contracts, except those belonging to 'CTM' option series, shall be exercised automatically, unless 'contrary instruction' has been given by long position holders of such contracts for not doing so. D. All Out of the money (OTM) option contracts, except those belonging to 'CTM' option series, shall expire worthless. E. All exercised contracts within an option series shall be assigned to short positions in that series in a fair and non-preferential manner. VI. Trading Hours: Trading hours shall be same as those of corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ients (as determined in Clause '2.10.2(I) or 2.10.3 (I)'below) shall be added without netting off among themselves as also against proprietary positions of the member. Thus, all long clients and all short clients shall be added up separately and higher of the two shall be reckoned as Member's open position in a commodity derivative. 2.10.2. Agricultural Commodity Derivatives SEBI Circular No SEBI/HO/CDMRD/DMP/CIR/P/2016/96 dated September 27, 2016 Following norms shall be applicable on Agricultural commodity derivatives at commodity level: I. For the purpose of calculating positions of a client, all long and short positions of the client across all contracts shall be added up separately and higher of the two shall be considered as his overall open position. II. For determination of numerical value of overall client level open position limits, following framework is prescribed for agricultural commodities Revised via SEBI circular SEBI/HO/CDMRD/DMP/CIR/P/2017/84 dated July 25, 2017: A. Categorization of commodities: In any given year, based on the average of production data and import data of past five years on a rolling basis and keeping in view various extraneous factors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cultural commodities for each year, the national commodity derivatives exchanges shall take into account the latest production figures of such commodities as annually declared by relevant government sources or from the latest 'third advance estimates' of agricultural commodities published by the Ministry of agriculture or any other yearly estimates/assessments of production and imports made by any governmental agencies such as Ministry of Agriculture, Ministry of Textiles, Ministry of Commerce, different statutory boards/associations etc., concerned with different agricultural commodities. The national commodity derivatives exchanges shall indicate the sources from which the production and import / export data have been obtained for the purpose of determination of 'deliverable supply' of different agricultural commodities. iv. Every year, for each agricultural commodity that is being traded in the derivatives market, all national commodity derivatives exchanges shall jointly complete the exercise of determination of 'deliverable supply, categorization/re-categorization of commodities and computation of numerical value of position limits. Numerical values of position limits fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be added up separately and higher of the two will be reckoned. SEBI circular no. CDMRD/DMP/CIR/32/2016 dated January 29, 2016 V. Exchange-wide Position Limit for Agricultural Commodities: The overall Exchange-wide gross position limit on open interests shall be 50% of its 'deliverable supply' determined for the relevant year, which shall also be jointly notified by Exchanges along with client level numerical limits. Revised via SEBI circular SEBI/HO/CDMRD/DMP/CIR/P/2017/84 dated July 25, 2017 2.10.3. Non-Agricultural Commodity Derivatives SEBI Circular No SEBI/HO/CDMRD/DMP/CIR/P/2016/96 dated September 27, 2016 The following norms shall be applicable to Non- Agricultural commodity derivatives at commodity level:- I. For the purpose of calculating overall position of a client, all long and short positions of the client across all contracts shall be netted out. II. Client level position limits shall be equivalent to the numerical level limit as given in table in Annexure E or 5% of market-wide open interest, whichever is higher. III. Member level position limits shall be 10 times of the numerical value of client level position limits or 20% of the market-wide open interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rlying physical market based upon his/its Export or import commitments/ Stocks held/ Past track record of Production or Purchase or Sales/Processing capacity and other factors as the Exchanges may deem appropriate. D. The Exchanges shall undertake proper due diligence by verifying documentary evidence of the underlying exposure and ensuring that the hedge limit granted is genuine and does not have the potential to disturb the equilibrium of the market of that particular derivative contracts. E. The hedge limit may also be made available in respect of the short open position acquired by an entity for the purpose of hedging against the stocks of commodities owned by it and, i. pledged with the Scheduled Commercial Banks/Co-operative Banks ii. lying in any Government Entity's warehouse/ WDRA Approved warehouses or iii. lying in any other premises (warehouse, factory etc.),provided the premises is either owned by the hedger or taken on lease by the hedger in its name and Exchange has ascertained that such premises are well equipped with quality control safeguards for storage of the relevant commodity and shall be subject to the production of the relevant Bank Certificate/Wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p 10 clients including hedgers 10 days after completion of settlement, for the information of the market IV. Their members' proprietary position on monthly basis. The disclosure shall include average daily proprietary position (during the month) as a percentage of member's average daily total position (including clients) and average daily margin on proprietary position (during the month) as a percentage of margins on member's average daily total position (including clients) V. The percentage of proprietary trade and client trade done and also specify as to what percentage of this trade is by algorithmic trading/HFT. This information shall be displayed before opening of the markets on the next day. VI. Members' data as mentioned in Annexure H. VII. List of the members whose request of surrender has been approved by the Exchange, along with date of approval VIII. Break up of funds contributed into Settlement Guarantee Funds and will be updated on quarterly basis IX. Disclosure of information regarding trading activity during life cycle of contract as mentioned in Annexure I. 2.11.2. The Exchanges which are suspending/expelling/declaring defaulter their members for irregu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n wherever such facility is being misused by any member. 2.14. Participation of category III Alternative funds (AIFs) in Commodity Derivatives Market SEBI Circular No SEBI/HO.CDMRD/DMP/CIR/P/2017/61 dated June 21, 2017 2.14.1. Category-III Alternative Investment Funds (AIFs) are allowed to participate in the commodity derivatives market subject to the following conditions: i. Category III AIFs may participate in all commodity derivatives products that are being traded on the commodity derivatives exchanges as 'clients' and shall be subjected to all the rules, regulations and instructions, position limit norms as may be applicable to clients, issued by SEBI and Exchanges from time to time. ii. Category III AIFs shall invest not more than ten percent of the investable funds in one underlying commodity. iii. Category III AIFs may engage in leverage or borrow subject to consent from the investors in the fund and subject to a maximum limit, as specified by the Board from time to time. iv. Category III AIFs shall make disclosure in private placement memorandum issued to the investors about investment in commodity derivatives. Consent of existing investor(s) shall be taken by AI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable. 2.16.2. Immediately on receipt of the information about default of a member, the other Stock Exchange / Clearing Corporation shall declare the said member defaulter on all its segments. 2.16.3. The Stock Exchanges / Clearing Corporations shall take appropriate action against the associates of defaulter member. For this purpose, the term 'associate' shall include a person: I. who, directly or indirectly, by itself, or in combination with other persons, exercises control over the member, whether individual, body corporate or firm or holds substantial share of not less than 15% in the capital of such entities; or II. in respect of whom the member, individual or body corporate or firm, directly or indirectly, by itself or in combination with other persons, exercises control; or III. whose director or partner is also a director or partner of the member, body corporate or the firm, as the case may be. Explanation: The expression "control" shall have the same meaning as defined under clause (e) of Regulation 2 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. 2.17. Broad guidelines on Algorithmic Trading for National Commodity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co-Hosting or any other facility or arrangement which puts some members in disadvantageous position vis-à-vis other members shall not be allowed. Algorithmic trading shall not be permitted from Exchange hosted CTCL terminals. 2.17.6. In order to ensure orderly trading in the market and fair usage of the trading platform by all the members, Exchanges shall put in place the following economic disincentives for daily algorithmic order-to-trade ratio: Member-wise Daily Order-to-Trade Ratio (X) Charges (Per order) Up to 50 NIL 50 to less than 250 (on incremental basis) 1 paise 250 to less than 500 (on incremental basis) 5 paise 500 or more than 500 (on incremental basis) 5 paise I. In case the ratio is 500 or more than 500 during a trading day, the concerned member shall not be permitted to place any order for the first 15 minutes on the next trading day (in the continuous trading session) as a cooling off action . However, the trading member shall be permitted to enter transaction in risk reducing mode during such a cooling off period. II. For the purpose of calculation of daily Order-to-trade ratio, all algorithmic orders, i.e. order entry, order modifications a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribe any other limit which may be a pre - set percentage of LTP. 2.17.11. In the interest of orderly trading and market integrity, the exchanges shall put in place a system to identify dysfunctional algorithms (i.e. algorithms leading to loop or runaway situation) and take suitable measures , including advising the member, to shut down such algorithms and remove any outstanding orders in the system that have emanated from such dysfunctional algorithms. Further, in exigencies, the exchange should be in a position to shut down the member's terminal. 2.17.12. The exchange may seek details of algorithmic strategies to be used by the members for purposes of inquiry, surveillance, investigation etc. 2.17.13. Any event leading to slow down or trading halt or any other abnormal development shall be immediately reported to Integrated Surveillance Department of SEBI with full details. 2.17.14. The Exchanges shall ensure that the member shall provide the facility of algorithmic trading only upon the prior written permission of the exchange. While considering such approval, the exchanges shall ensure that the controls specified in these guidelines are fully implemented by the member. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not released in violation of the maximum order size limit defined in the contract specification. C. Position limit: The net position of the client / member are not in violation of the position limits prescribed for the respective commodity. D. An algorithmic trading shall account for all executed, unexecuted and unconfirmed orders, placed by it before releasing further order(s). Further, the algorithmic system shall have pre-defined parameters for an automatic stoppage in the event of algorithmic execution leading to a loop or a runaway situation. The member shall have system to identify dysfunctional algorithms. E. All algorithmic orders are tagged with a unique identifier provided by the exchange in order to establish audit trail. VI. The Exchange shall ensure that the member, desirous of placing orders using algorithms, submit to the exchange an undertaking that- A. The member has proper procedures, systems and technical capability to carry out trading through the useof algorithms and to safeguard algorithms from misuse or unauthorized access. B. The member has real-time monitoring systems to identify algorithms that may not behave as expected. Member shall keep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emes - The exchange shall formulate its own benchmarks for selecting the commodity derivative product for liquidity enhancement with the broad objective of enhancing liquidity in illiquid securities. I. The exchanges shall introduce liquidity enhancement schemes on any commodity derivative product for a maximum period of three years. Once the scheme is discontinued, the scheme can be re-introduced on the same commodity derivative product provided it is less than the three year period since the introduction of scheme on that security. II. Further, an exchange may introduce liquidity enhancement schemes in commodity derivative product where liquidity enhancement scheme has been introduced in another exchange. Such schemes cannot be continued beyond the period of liquidity enhancement schemes of the initiating exchange. III. The list of commodity derivative product eligible for liquidity enhancement shall be disseminated to the market. IV. Any commodity that is classified as 'Sensitive Commodity' by the Exchange, shall not be eligible for LES. V. If any commodity derivative product is 'liquid' on any of the exchanges i.e. there is at least one exchange where the aver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... monitor the obligations of liquidity enhancers (liquidity provider, market-maker, maker-taker or by whatever name called) I. All market maker / liquidity enhancer orders / trades should be identifiable by the exchange. II. A conflict of interest framework shall be put in place by the exchange for the liquidity enhancement scheme. Such a framework shall provide for obligation on the part of the market maker / liquidity enhancer to disclose any conflict of interest while participating in the scheme. The same shall be disclosed by the exchange on their website. 2.19. Price Dissemination through SMS/Electronic Communication Facility SEBI Circular No SEBI/HO/CDMRD/DMP/CIR/P/2016/76 dated August 30, 2016 2.19.1. Exchanges shall make efforts for registration of subscribers of Price Dissemination services and disseminate derivatives prices to them on a daily basis. Such direct price dissemination service would provide information to subscribers instantly in an efficient and transparent manner and thus shall be of great benefit to market participants. 2.19.2. The Exchanges may provide price dissemination through SMS or any other electronic communication facility (instant messengers, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e maintained till the trial or investigation proceedings have concluded. 2.22. Portfolio Management Services in Commodity Derivatives Market SEBI Circular No SEBI/HO/CDMRD/DMP/P/CIR/2016/100 dated September 27, 2016 2.22.1. Portfolio management services are not permissible in commodity derivatives Market. 2.23. Applicability of Principles of Financial Market Infrastructures (PFMIs) on Commodity Derivatives Exchanges SEBI Circular No SEBI/HO/CDMRD/DMP/CIR/P/2016/137 dated December 16, 2016 2.23.1. All CPSS and IOSCO members are required to strive to adopt the PFMIs and implement them in their respective jurisdictions. 2.23.2. SEBI as a member of IOSCO is committed to the adoption and implementation of the new CPSS-IOSCO standards of PFMIs in its regulatory functions of oversight, supervision and governance of the key financial market infrastructures under its purview. 2.23.3. Currently, all Commodity Derivatives Exchanges themselves are clearing and settling trade executed on their platform, i.e. they are acting as Central Counterparties (CCP) in these markets. Therefore, it has been decided that Commodity Derivatives Exchanges (currently providing in-house clearing services) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the exchange accredited WSPs, warehouses and assayers and are to be complied with in addition to those laid down by Warehousing Development and Regulatory Authority (WDRA), any other government authority from time to time. The Exchanges are at liberty to prescribe additional norms/guidelines for compliance by their accredited WSPs, warehouses and assayers, if they deem so fit, in addition to the norms laid down hereunder, for ensuring good delivery of commodities by them. Provided that such additional norms specified by the exchanges are not in contravention with the instruction issued herein. 3.1. Accreditation of WSP 3.1.1. The exchanges shall follow a transparent process for accreditation of WSP by issuing open advertisements in leading newspapers and/or putting the same up on the exchange website and through a transparent selection process thereafter. The selection process being/to be followed for such accreditation shall be displayed on the website of the Exchange in advance. The accreditation of the WSP shall be done with the approval of the Risk Management Committee of the Board of Directors of the Exchange. The exchange shall ensure that the application of the WSP/ware ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the accredited warehouses of WSP shall not, at any point of time, exceed 33 times of the net worth of the WSP. d) The exchanges may calculate the networth of WSP in the following manner. "the aggregate value of paid up equity share capital plus free reserves (excluding statutory funds, benefit funds and reserves created out of revaluation) reduced by the investments in businesses, whether related or unrelated, aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written off." e) In case of reduction in net worth below the stipulated amount, a time period of six month may be allowed to the WSP to augment its net worth. In the event the WSP is unable to augment the net worth to the requisite level within the allowed time frame, the WSP shall not carry out any new business i.e. can not include any new warehouse for new contracts/commodity/location. The exchange may take suitable measures, which are disclosed on its website for public information, with respect to the existing goods handled by such WSP. f) The WSP shall submit an audited net worth certificate to the exchange every six months i.e. at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... toring of the FSD vis-à-vis the value of the commodities stored needs to be done so as to ensure that the minimum stipulated FSD are always maintained with the Exchange. The exchange may ask for additional FSD over that stipulated above, if considered necessary. f) The FSD vis-a-vis the value of goods stored should be marked to market on replacement value on ongoing basis. g) The exchanges may specify the liquidity ratio (i.e. Liquidity Ratio= Current Assets/Current Liabilities) for WSPs, however it is desirable that such ratio is greater than 1. The Exchanges may, however, keep higher ratio. 3.4. Fit and Proper Criteria 3.4.1. The exchange shall ensure that the WSP, Promoters of WSP, assayers, Key Management Personnel (KMPs) of WSPs, warehouses and Assayers shall always be 'fit and proper' to carry out business of warehousing, have adequate knowledge of, and experience in generally accepted warehousing and handling practices for Commodities, and are competent and willing to operate such a warehouse for which the WSP has a valid license/expertise under the appropriate state warehousing laws in respect of the warehouses concerned. 3.5. Corporate Governance norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration to that effect to the Exchange, at regular intervals as directed by the exchange. 3.5.3. Standard Operating Procedure (SOP): The WSP shall have a SOP and the exchange shall obtain a standard operating procedure in respect of all the concerned warehouses from the WSP before granting accreditation to such warehouses. The SOP of a warehouse may cover the following but not restricted to: I. Procedures for acceptance of goods to be deposited II. Weigh bridge empanelment III. Procedures for weighing, sampling of goods to be deposited as per industry standards, Procedure for verification of commodity and communication to depositors, IV. Procedure for depositing and identifying the Exchange related goods, V. Procedure for maintaining the quality of the goods stored as per the exchange contract specification, VI. Procedure for Know your depositor requirements, VII. g) Security policy for ensuring the safety of the goods from theft, burglary etc., VIII. Procedure and guidelines for scientific storage of goods, including stacking etc. IX. Procedure for losses caused due to theft, fire, burglary, fraud, negligence and force majeure events, X. Procedure for internal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rehouses are well connected with rail and/or road networks and have sufficient space for parking and movement of large vehicle; 3.8.2. The warehouses are physically and operationally suitable for the proper storage of Commodities and: I. are of sound construction and in a state of good repair. The walls, the floor and the roof do not permit water seepage or are source of any insect infestation; II. have adequate equipment, installed and maintained in good working order, as may be prescribed by the Exchange, for the movement of commodities into, out of and within the warehouse. Further, the employees employed at the warehouses shall undergo training in fire safety and use of firefighting equipments; III. have adequate firefighting equipment installed within its premises and have fire escapes and fire hydrant points clearly marked; IV. have required ventilation, installed and maintained in good working order, as may be prescribed by the Exchange, for the proper storage and preservation of quality of goods; V. have adequate lighting arrangement as may be prescribed by the Exchange; VI. are free from materials and substances that may adversely affect the quality of stored ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the facilities available in such warehouse, or to inspect the level of compliance g of the warehousing norms stipulated by the exchange/regulator from time to time. 3.8.10. The WSP shall undertake to have assaying/testing facilities for the commodities it intends to render warehousing facility, or shall undertake to be associated with an assaying/testing agency which may preferably be certified by one or more national/international agencies like NABL (National Accreditation Board for calibration and testing Laboratories), BIS etc., as specified by the exchange. 3.8.11. The WSP shall provide for accurate and efficient weighing, sampling, inspection and grading of the Commodities deposited in its warehouses. The Exchange shall ensure that the WSP has deployed personnel who have knowledge and experience in sampling, weighing, inspecting and/or grading of commodities. 3.8.12. The WSP shall have its own or access to fumigation facilities/agencies for pest control activities. 3.8.13. Exchanges shall ensure that the WSPs have in place, necessary policies, control and system in place for dealing with the risk that may be arising due to the warehouses being used for purposes other th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing an additional independent assayer may be dispended with. 3.9.3. The exchanges shall ensure that the empanelled assayers work independently and their operations are governed by prescribed Standard Operating Procedures (SOPs). The assayers shall be preferably certified by one or more national/international agencies like NABL (National Accreditation Board for calibration and testing Laboratories), BIS etc., and shall have the facilities as laid down by the exchanges from time to time. 3.10. Warehouses at delivery centres 3.10.1. The exchanges shall ensure that all the warehouses of a WSP accredited by them are registered with the statutory authority viz., WDRA. The exchanges shall take necessary steps to ensure that warehouses which are not registered with the WDRA are registered by WDRA within 6 months from the date of such accreditation, failing which the accreditation given to the WSP in respect of such warehouses shall expire. 3.10.2. The exchanges shall have at least one warehouse at each of the delivery centres (as specified in the contract specification) at the time of launch of contract itself and address of such warehouses shall be mentioned in the contract specificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above, the audit may also be conducted on risk profiling, as identified by the Exchange. For this purpose, the Exchange shall form a panel of independent expert agencies and the cost of such audit shall be borne by the respective Exchange. III. The result of such audit/audit report shall be displayed by the Exchange on its website immediately after the completion of the audit and submission of report by the auditor. IV. The exchanges shall prepare a panel of such independent expert agencies for carrying out inspection of warehouses, which shall also be reviewed by the Exchange from time to time. In addition, the Exchanges shall also conduct in-house physical audit of accredited warehouses at regular intervals. V. Exchange should also carry out surprise inspections of warehouses as and when such exigencies arise in terms of the prescribed norms. VI. The exchange shall have a policy of rotation of such independent expert agencies for carrying out inspection after every 3 years with a provision for 'cooling off' period of 1 year. VII. The exchange shall have a detailed inspection manual for carrying out the audits and inspections of the WSP/warehouses concerned. 3.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em 3.16.1. WSP shall have a Standard Operating Procedure (SOP) which is process-dependent and not person-dependent. It is desirable that there should be electronic record of information at the WSP and a MIS system with an arrangement for flow of real time information from the warehouse location to the central MIS and onwards to Exchange electronically. The MIS should have the capability to capture and disseminate information regarding stocks being held warehouse wise/location wise, and the availability of space in the warehouses. 3.16.2. The exchange shall display on a daily basis warehouse wise details of the space available, stock of goods held, name of the warehouse service provider, details of location of the warehouse, particulars of acceptance/rejection of goods by the warehouse concerned, details of empanelled assayers and independent assayers, if any, attached to the warehouse etc., on its website. The archives of such reports shall be available on the exchange website. 3.16.3. The participants/clients willing to deposit goods in Exchange accredited Warehouses would submit a request to the Exchange. The Exchange shall use a transparent and time-bound process for the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to provide its services to any commodity derivatives exchanges for 3 years. 3.17.7. Adequate notice intimation to general public / clients should be given through widely published newspapers and website etc. before accepting the surrender of WSP or cancellation/expulsion of the WSP. 3.18. Business Continuity Plan 3.18.1. A WSP shall put in place, a business continuity plan and submit such plan to the exchanges. 3.19. Actions against WSPs 3.19.1. The Exchange may frame byelaws/rules/regulations/guidelines for its accredited WSPs to rectify correct their misconduct or misconduct on the part of any of its approved warehouses used for storing goods for delivery on exchange platform. The exchanges may also direct the WSPs to indemnify an entity aggrieved by the delivery process of its warehouse or, in serious cases of misconduct/malfeasance, revoke the accreditation of the concerned warehouse or/and hold the WSP accountable for any legal liabilities, if the concerned erring WSP/ warehouse engages in any of the following offences: I. refuses to accept delivery without any bonafide reasons or, issues a falsified certificate of delivery; II. violates any of the Exchange's rules or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivatives Exchanges SEBI Circular No. CIR/CDMRD/DRMP/01/2015 dated 01 Oct 2015 4.1.1. Overview The core of the risk management system of national commodity derivatives exchanges (Exchanges) shall comprise of the following: I. Liquid Assets: Liquid assets shall be deposited by members with the Exchanges in compliance with the norms specified herewith to cover various margin and deposit requirements. II. Initial Margins (IM) SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2016/77 dated September 01, 2016: Margins to cover potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default subject to minimum percentage floor value as prescribed by SEBI from time to time. III. Extreme Loss Margins (ELM): Margins to cover the loss in situations that lie outside the coverage of the VaR based initial margins. IV. Additional Margins: Margins imposed on both long and short sides over and above the other margins, would be called additional margins. Tender Period Margin/Pre-expiry Margin: Exchanges shall levy tender period /pre-expiry margin which may be increased gradually every day beginning from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, if available, or else, using the NAV of the unit treating it as a liquid security (as per methodology given in para (ii) of Annexure J.). Corporate Bonds having rating of AA or above( or with similar rating nomenclature) by recognised credit rating agencies Fixed percentage based or VaR based Haircut. A higher haircut may be considered to cover the expected time frame for liquidation. To begin with the haircut shall be a minimum of 10% Not to exceed 10% of the total liquid assets of the clearing member. (see Note 'e') Bullion 20% Total commodities collateral for any clearing member shall not exceed 30% of the total liquid assets of the clearing member, out of which non-bullion collateral shall not exceed 15% of the total liquid assets of the clearing member SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2016/112 dated 14 October 2016 (see note 'f') Gold ETF 20% Steel 60% Agricultural Commodities 40% Notes: a. The valuation of the liquid assets shall be done on a daily basis after applying applicable haircuts. b. The exchanges shall lay down exposure limits either in rupee terms or as percentage of the total Liquid Assets that can be exposed to a single bank directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selves or banks who are associate of trading/ clearing member. Explanation -for this purpose, 'associate' shall have the same meaning as defined under Regulation 2 (b) of SECC Regulations2012. 4.1.3. Commodity Futures I. Initial Margins (IM) SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2016/77 dated 01 Sep 2016 Exchanges shall impose initial margins sufficient to cover its potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. Exchanges shall therefore estimate appropriate Margin Period of Risk (MPOR) for each product based on liquidity in the product. However, the MPOR for all commodity derivatives contracts shall be at least 2 days. A. Minimum value for Initial Margin: Minimum value of initial margin would be subject to commodity specific floor value as may be specified by SEBI from time to time. Currently floor value of IM applicable for Nickel shall be 5% and for all other commodities it shall be 4%. B. Margin Computation at client portfolio level: Margins shall be computed at the level of portfolio of each individual client comprising his positions in futures con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd their correlation and if there are changes such that spread margin benefit is no longer appropriate to be given, shall take appropriate further course of action. D. Real Time Computation: The margins should be computed on real time basis. The computation of portfolio initial margin would have two components. The first is the computation of initial margin for each individual contract. At the second stage, these contract initial margins would be applied to the actual portfolio positions to compute the portfolio initial margin. The exchanges are permitted to update EWMA volatility estimates for contracts at discrete time points each day (with a gap of not more than 2 hours between any two consecutive updates and at the end of the trading session) and the latest available scaled up WMA volatility estimates would be applied to member/client portfolios on a real time basis. II. Extreme Loss Margin (ELM): ELM of 1% on gross open positions shall be levied and shall be deducted from the liquid assets of the clearing member on an online, real time basis. III. Additional Margins: Exchanges may levy Additional Margins based on their evaluation in specific situations as may be necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edit exposure that accounts for relevant risk factors and portfolio effects, and C. to the extent practicable and prudent, limit the need for destabilizing, pro-cyclical changes. Initial margin requirement shall be adequate to cover 99% VaR (Value at Risk) and Margin Period of Risk (MPOR) shall be at least two days. In case of portfolio based margining, this requirement applies to each portfolio's distribution of future exposure. Accordingly, exchanges shall fix prudent price scan range, volatility scan range and/or plausible changes in any other parameters impacting options price. Exchange shall impose appropriate short option minimum margin, calendar spread charge and extreme loss margin for option contracts. II. Margining at client level: Exchanges shall impose initial margins at the level of portfolio of individual client comprising of his positions in futures and options contracts on each commodity. III. Real time computation: Though the margining models may update various scenarios of parameter changes (underlying price, volatility etc.) at discrete time points each day (at least every two hours), the latest Page 4 of 4 available scenarios shall be applied to client ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h circumstances that cannot be anticipated or were not anticipated while designing the risk management system. If ad-hoc margins are imposed with any degree of regularity, exchanges should examine whether the circumstances that give rise to such margins can be reasonably anticipated and can therefore be incorporated into the risk management system mandated by SEBI. Exchanges are encouraged to analyse these situations and bring the matter to the attention of SEBI for further action. B. Any additional margins that the exchanges may impose shall be based on objective criteria and shall not discriminate between members on the basis of subjective criteria. C. Transparency is an important regulatory goal and therefore every effort must be made to make the risk management systems fully transparent by disclosing their details to the public. 4.1.7. Margin Provisions for Intra-day crystallized losses: SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2018/52 dated 21 March 2018 To mitigate the risk arising out of accumulation of crystallized obligations incurred on account of intra-day squaring off of positions, the following has been decided: A. The intra-day crystallized losses shall be m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surrender of membership provided that there is no unsettled claim against member and no arbitration cases are pending against the member. 4.1.11. Risk Reduction Mode Exchanges shall ensure that the trading members/clearing members are mandatorily put in risk-reduction mode when 90% of the member's Liquid Assets available for adjustment against margins/deposits gets utilized for margins/deposits. Such risk reduction mode shall include the following: I. All unexecuted orders shall be cancelled once trading member himself or his clearing member breaches 90% collateral utilization level. II. Only orders with Immediate or Cancel attribute shall be permitted in this mode. III. All new orders shall be checked for sufficiency of margins and such potential margins shall be blocked while accepting the orders in the system. IV. The trading member shall be moved back to the normal risk management mode as and when the collateral utilization level of the trading member as well as his clearing member is lower than 90%. 4.1.12. Measures in case of repeated shortfall in margin/pay-in SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2016/77 dated 01 September 2016 In case of repeated margin/p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II. The members are required to collect upfront initial margins and extreme loss margins SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2016/93 dated 26 September 2016 from their clients. The members will have time till 'T+2' working days to collect margins (except initial margins and extreme loss margins) from their clients. (The clients must ensure that the initial margins and extreme loss margins are paid in advance of trade and other margins are paid as soon as margin calls are made by Exchanges/Members. The period of T+2 days has been allowed to members to collect margin from clients taking into account the practical difficulties often faced by them only for the purpose of levy of penalty and it should not be construed that clients have been allowed 2 days to pay margin due from them.) III. The members shall report to the Exchange on T + 5 day the actual short-collection/non-collection of all margins from clients. IV. Penalty shall be levied as per the details given below on the members for short / non-collection of margins from their clients beyond T + 2 working days: For each member 'a' Per day penalty as % of 'a' (< INR 1 lakh) and (< 10% of applicable margin) 0.5 (> ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein members and/or clients were not in position to square off the open positions to avoid levy of penalty for margin shortfall due to lack of adequate liquidity and/or high market volatility, exchanges may take a suitable decision depending upon the merit of the circumstances and keep SEBI informed of the same. Further, the exchanges are directed to take such exceptional matters to their Board of Directors for decision. 4.1.15. Settlement Guarantee Fund, Default Waterfall and Stress Testing I. Provisions applicable to Commodity Derivatives Exchanges (till transfer of Clearing and Settlement functions to Clearing Corporations) A. Components of SGF: i. The initial contribution to SGF by the Exchange equal to 5% of the sum total of the Gross revenues of the Exchange for the preceding financial years starting from financial Year 2007-08 or from the date when the Exchange was set up, till the Financial Year 2012-13, subject to a minimum of ₹ 10 crores. ii. Base minimum capital of members iii. Interest accrued on Base Minimum Capital iv. All settlement related penalties charged by the Exchange from members with effect from 1st September, 2013 v. Interest amount an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l clearing and settlement of trades in commodity derivatives are transferred to clearing corporations, the default waterfall of exchanges shall follow the following order: i. Defaulting member's monies (including contribution to SGF) ii. Insurance, if any iii. Exchange resources equal to 5% of SGF iv. SGF resources in the following order: a. Penalties and investment income on SGF b. 25% of Exchange contribution to SGF c. Remaining (non-defaulting members' and exchange) contribution to SGF on pro-rata basis. v. Remaining exchange resources (excluding INR 100 Crore*) vi. Capped additional contribution by non-defaulting members (equal to their required contribution to SGF) vii. Any remaining loss to be covered by way of pro-rata haircut to payouts. *INR 100 Crore to be excluded only when remaining exchange resources are more than INR 100 Crore. II. Provisions applicable to Clearing Corporations and Stock Exchanges in Commodity Derivatives (Post transfer of Clearing and Settlement Functions) SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2018/111 dated 11 July 2018 Clearing Corporations and Stock Exchanges in Commodity Derivatives shall comply with provisions given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifications and contract launch calendar should not be changed without prior approval. For any modification in contract specification or contract launch calendar, the Exchange(s) shall give prior appropriate notice to the market participants. Once the contracts are commenced, no terms of the contract specifications should be changed without prior approval of SEBI. IV. In case of contracts approved for continuous trading: A. If Exchange decides not to launch new contract for trading, then Exchange shall inform market participants well in advance and shall also keep the regulator informed with adequate reasons for not launching of such contract. B. If Exchange decides to de-list already running contract(s) having nil open interest, then exchange shall keep the regulator informed with adequate reasons for de-listing the contract(s). C. The re-launch of new contracts in case of A and B above shall be with prior approval of SEBI. V. The contracts approved for continuous trading in agri-commodities shall continue to follow the lean month expiry policy as laid down and shall be subject to any other directions as may be issued by SEBI from time to time. Also, apart from the approv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppens to be a Saturday, Sunday or exchange holiday, the tender period shall start from the next working day. II. Seller/buyer shall have an option of marking an intention of giving/taking delivery on any day from start of the tender period up to expiry of the contract. III. Exchange shall allocate delivery to buyers having open long position as per random allocation methodology to ensure that all buyers have an equal opportunity of being selected to receive delivery irrespective of the size or value of the position. However, preference may be given to buyers who have marked an intention of taking delivery. IV. If the tender date is T, then pay-in and pay-out shall happen latest by T+2th working day. V. Open position on expiry of the contract would result in compulsory delivery and would be settled at Final Settlement Price (FSP) of the respective contracts and pay-in and pay-out shall happen latest by the 2nd working day after expiry. 6.1.2. Early delivery system In all futures contracts for which early delivery system is mandated, the framework shall be as given below: I. An early delivery period may be provided during E-14 to E-1 days (where E stands for expiry day) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her than Settlement Price, else this component will be zero.) B. Futures contracts on non-agri commodities: 3% of Settlement Price + replacement cost (difference between settlement price and higher of the last spot prices on the commodity pay-out date and the following day, if the spot price so arrived is higher than Settlement Price, else this component will be zero.) II. Exchanges shall have the flexibility to increase/decrease penalty for specific commodities depending on situation, in consultation with SEBI III. Norms for apportionment of penalty - A. At least 1.75% of Settlement Price shall be deposited in the IPF of the exchange B. Up to 0.25% of Settlement Price may be retained by the Exchange towards administration expenses C. 1% of Settlement Price + replacement cost shall go to buyer who was entitled to receive delivery IV. Exchange shall have appropriate deterrent mechanism (including penal/disciplinary action) in place against intentional/wilful delivery default. V. Buyer default shall not be permitted. 6.1.5. Fixation of Final Settlement Price (FSP) I. For contracts where Final Settlement Price (FSP) is determined by polling, unless specifically appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangible; or B. commodity is difficult to store may be due to low shelf life or inadequate storage infrastructure; or C. it is difficult to physically handle and transport the commodity due to inadequate logistics and transport infrastructure. II. There is availability of reliable benchmark price of the commodity which can be used as reference for settlement price. Exchanges shall satisfy themselves that the reference spot price is robust - fair indicator of prevailing prices and not susceptible to any distortion/manipulation. Subject to the above conditions, both cash settled and physically settled derivative contracts on the same commodity may also be considered for trading, in case basis of price discovery of the proposed contracts is different. 6.3. Disclosure of disablement of member terminals SEBI Circular No. SEBI/HO/CDMRD/DRMP/CIR/P/2016/93 dated 26 September 2016 The disablement of terminals of the members along with duration of disablement due to shortage of funds, margin money etc., shall be disclosed by Exchange on its website at the end of every quarter i.e., 30th June, 30th September, 31st December and 31st March. 6.4. Timelines for marking delivery intent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of 90 days. III. Exchanges shall publish the notice in all the editions of at least one English national daily with wide circulation and in at least one regional language daily with wide circulation at the place(s) where the concerned Exchange Member(s) is/are situated. IV. The notice calling for claims shall be displayed on the website of the Exchange for the entire specified period. V. The notice shall contain the specified period, the maximum compensation limit for a single claim of an investor/client and all other relevant information. 7.1.4. Eligibility of Claims SEBI Circular no. CIR/HO/CDMRD/DEICE/CIR/P/2016/53 dated June 13, 2017 I. The claims received against the defaulter member during the specified period shall be eligible for being considered for compensation from the IPF. II. If any eligible claim arises within three years from the date of expiry of the specified period, such claim A. shall be considered eligible for compensation from IPF/CPF in case where the defaulter member's funds are inadequate. In such cases, IPF/CPF Trust shall satisfy itself that such claim could not have been filed during the specified period for reasons beyond the control of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilable against a single claim from an investor at least every three year. III. Exchanges shall disseminate the compensation limit fixed by them and any change thereof, to the public through a Press Release and through their Website. 7.1.7. Disbursements of claims from the IPF I. The IPF Trust shall disburse the amount of compensation from the IPF to the investors and such compensation shall not be more than the maximum amount fixed for a single claim of an investor. II. The compensation shall be disbursed to the investor from the IPF in case there is a shortage of defaulter broker's assets after its realization. III. The Exchange shall ensure that the amount realized from the assets of the defaulter member is returned to the defaulter member after satisfying the claims of the exchanges and SEBI in accordance with the bye-laws of the exchange. Provided that in case of a member broker having membership on multiple exchanges, amount realized from the assets of the defaulter member shall be returned to the said member only after satisfying eligible claims of the concerned exchange, SEBI, and other exchanges as the case may be. Provided further that in cases where any litig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in other manner as prescribed/permitted by SEBI in the interest of investors from time to time. II. The unutilized IPF interest income accruing during a specific financial year can be carried forward to the next financial year to enable effective utilization of such money by the exchanges during such extended period. III. The exchange shall also be permitted to utilize IPF interest income for undertaking research activities related to commodities market, provided every such research activity / project can be undertaken only after obtaining prior written approval of the trustees of the IPF Trust, who would inter alia, record the reasons, relevance and stated objectives of the research project while according approval to such activity/ project. Further, the Board of the exchange may be apprised of the research programs / activities being undertaken at least once in every quarter or half year of a given financial year. There will be an overall cap on the total amount, not more than 10% of the interest amount of IPF which can be spent on Research activities related to commodities market. IPF shall frame a policy towards identifying / recognising public and private academic insti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. for the education of the investors. VIII. The ISC shall conduct various investor education and investor awareness programs through seminars, lectures, workshops, publications (print and electronic media), training programs etc. enhance literacy and promoting participation in the commodity derivatives market. 7.2.2. Contribution to ISF I. At initial stage, the exchange shall contribute a minimum of Rs Ten Lakhs towards setting up of Investor Service Fund (ISF). Subsequently, onwards, the Exchanges shall transfer the 1% percent of the turnover fees charged by the exchange from its members on monthly basis towards ISF within 7 days of the end of the month, subject to minimum of Rs. Ten Lakh in a financial year. II. The Exchange shall also plough back the entire income earned on the corpus of ISF to the ISF within one month from the end of September and March of each year. III. The exchange shall be permitted to utilize the corpus of ISF for conducting various investor education and awareness programs, capacity building programs and maintenance of all price ticker boards installed by the respective exchanges, cost of training of arbitrators etc. In addition to above, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of IGRC shall not be associated with a trading member in any manner. V. Empanelment of IGRC members SEBI Circular No. CIR/CDMRD/DEICE/CIR/P/2017/77 July 11, 2017.: Exchanges shall empanel IGRC members, however, no arbitrator/ appellate arbitrator shall be empaneled as IGRC member. VI. The disclosures and code of conduct prescribed is given below: A. The name of a person shall be included in the panel after obtaining : i. a declaration that he has not been involved in any act of fraud, dishonesty or moral turpitude, or found guilty of any economic offence, ii. disclosure of the nature of his association with securities market iii. disclosure of the names of his dependents associated with the securities market as member, sub-broker or authorized person, and iv. an undertaking that he shall abide by the code of conduct prescribed in this circular. B. Code of Conduct for IGRC Members An IGRC Member shall - i. act in a fair, unbiased, independent and objective manner; ii. maintain the highest standards of personal integrity, truthfulness, honesty and fortitude in discharge of his duties; iii. disclose his interest or conflict in a particular case, i.e., whether a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stor, Exchanges shall block the admissible claim value from the deposit of the Member. VII. The exchange shall give a time of 7 days to the Member from the date of signing of IGRC directions as mentioned under sub-para (d) above to inform the Exchange whether the Member intends to pursue the next level of resolution i.e. Arbitration. VIII. In case, the Member does not opt for arbitration, the Exchange shall, release the blocked amount to the investor after the aforementioned 7 days. IX. In case, the Member opts for arbitration and the claim value admissible to the investor for interim relief paid out of IPF in exchanges is prescribed below SEBI Circular No. CIR/CDMRD/DEICE/CIR/P/2017/77 dated July 11, 2017: A. In case, award is in favour of client and the member opts for arbitration wherein the claim value admissible to the client is not more than ₹ 20 lakhs (Rs. Twenty lakhs), the following steps shall be undertaken by the Exchange: i. In case the IGRP award is in favour of the client then 50% of the admissible claim value or ₹ 2.00 lakhs (Rs. Two lakhs), whichever is less, shall be released to the client from IPF of the Exchange. ii. In case the arbitratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke good the amount released out if IPF then investor (based on PAN of the investor) shall not be allowed to trade on any of the Exchanges till such time the investor refunds the amount to IPF. Further, the securities lying in the demat account(s) of the investor shall be frozen till such time as the investor refunds the amount to the IPF. x. The exchanges may also resort to displaying the names such investors on their websites if considered necessary. B. Exchanges, in consultation with the IPF Trust and SEBI, shall review and progressively increase the amount of interim relief available against a single claim for an investor, at least every three years. C. The Exchanges shall disseminate the interim relief limit fixed by them and any change thereof, to the public through a Press Release and also through its website. 8.1.3. With a view to rationalize the timelines involved in the arbitration mechanism, Exchanges are advised as under: I. The Members are required to file application for appellate arbitration within one month of the date of receipt of arbitral award. Further as per section 34 (3) of the Arbitration and Conciliation Act, 1996 the Members have three months to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.2.4. Maintenance of a Panel of Arbitrators. I. A exchange shall maintain a panel of arbitrators. The number of arbitrators in the panel shall be commensurate to the number of disputes so that an arbitrator handles a reasonable number of references simultaneously and all arbitration references are disposed of within the prescribed time. II. The exchange shall have a set of fair and transparent criteria for inclusion of names in the panel of arbitrators. III. While deciding to include a particular person in the panel of arbitrators, the exchange shall take into account the following factors: A. age, B. qualification in the area of law, finance, accounts, economics, management, or administration, and C. experience in financial services, including securities market. IV. The name of a person shall be included in the panel after obtaining: A. a declaration that he has not been involved in any act of fraud, dishonesty or moral turpitude, or found guilty of any economic offence, B. disclosure of the nature of his association with securities market, C. disclosure of the names of his dependents associated with the securities market as member, sub-broker or authorized p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... An appeal before the appellate panel of arbitrators may be filed within one month from the date of receipt of arbitral award. III. The appellate panel shall consist of three arbitrators who shall be different from the ones who passed the arbitral award appealed against. IV. The exchange shall ensure that the process of appointment of appellate panel of arbitrators is completed within 30 days from the date of receipt of application for appellate arbitration. V. The appeal shall be disposed of within three months from the date of appointment of appellate panel of such appeal by way of issue of an appellate arbitral award. VI. The Managing Director/ Executive Director of the exchange may for sufficient cause extend the time for issue of appellate arbitral award by not more than two months on a case to case basis after recording the reasons for the same. VII. A party aggrieved by the appellate arbitral award may file an application to the Court of competent jurisdiction in accordance with Section 34 of the Arbitration and Conciliation Act, 1996. 8.2.8. Arbitration Fees SEBI Circular No. CIR/CDMRD/DEICE/CIR/P/2017/77 dated July 11, 2017. The fee structure (exclusive of stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, whichever is relevant for the dispute , and after excluding:- A. The time taken by the Investors Grievances Redressal Committee of the Exchange (the time taken from the date of receipt of dispute till the decision by the committee) to resolve the dispute under its Rules, Bye-laws & Regulations, and B. The time taken by the member to attempt the resolution of the dispute (the time from the date of receipt of dispute by the member to the date of receipt of the member's last communication by the client) or one month from the date of receipt of the dispute by the member, whichever is earlier. IV. A party filing an appeal before the appellate panel [as mentioned above 8.2.7 Appellate Arbitration] shall pay a fee not exceeding ₹ 30, 000, as may be prescribed by the exchange, in addition to statutory dues (stamp duty, service tax, along with the appeal. In case the party filing the appeal is a client having claim / counterclaim of up to ₹ 10 lakh, then the party shall pay a fee not exceeding ₹ 10, 000/-. Further expenses thus arising shall be borne by the Exchanges and the Investor Protection Fund of Exchanges equally. 8.2.9. Place of Arbitration / Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t/ soft copies shall be provided to the arbitrators along with original submissions in physical copies. 8.2.13. Review and training of arbitrators Investor Service Committee of the Exchanges shall review the performance of the arbitrators annually and submit the review report to the Board of the Exchange. Training need of the arbitrators will be catered by National Institute of Securities Markets (NISM). Cost of training of arbitrators may be incurred from ISF of the exchange. The NCDEs shall provide training of at least one day to every arbitrator each year SEBI Circular No. CIR/CDMRD/DCE/CIR/P/2018/48 dated March 14, 2018. 8.2.14. Mechanism for implementation of award. Exchanges shall create a common database of defaulting clients accessible to members across the Exchanges. For this purpose, a client may be identified as defaulter if the client does not pay the award amount to the member as directed in the IGRC/ arbitration/ appellate arbitration order and also does not appeal at the next level of redressal mechanism within the timelines prescribed by SEBI or file an application to court to set aside such order in accordance with Section 34 of the Arbitration and Concil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ersonnel of the exchange can be on the committee and one of which shall necessarily be the Managing Director of the exchange; iv. The Committee may also include independent external persons such as retired judge, etc. v. SEBI may nominate members in the Committee, if felt necessary in the interest of commodities market; Defaulters' Committee i. To realize all the assets / deposits of the defaulter/ expelled member and appropriate the same amongst various dues and claims against the defaulter/ expelled member in accordance with the Rules, Byelaws and Regulations of the exchange. ii. In the event both the clearing member and his constituent trading member are declared defaulter, then the Defaulter's Committee of the exchange and the Defaulter's Committee of the clearing corporation shall work together to realise the assets of both the clearing member and the trading member. iii. Admission or rejection of claims of client/ trading members/ clearing members over the assets of the defaulter/ expelled member. iv. Advise in respect of the claims to the Trustees of the IPF on whether the claim is to be paid out of IPF or otherwise. i. The Committee shall have a minimum of 3 mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Common Pool' for Delhi. III. If the client and member (broker, trading member or clearing member) fail to choose the Arbitrator(s) from the Common Pool, the Arbitrator(s) will be chosen by an 'Automatic Process' wherein neither the parties to arbitration (i.e. client or member) nor the concerned Exchanges will be directly involved. IV. The 'Automatic Process' will entail a randomized, computer generated selection of Arbitrator, from the list of Arbitrators in the 'Common Pool'. The selection process shall be in chronological order of the receipt of arbitration reference i.e. only after selecting an arbitrator for the former arbitration reference received, selection for the latter shall be taken up. V. The 'Automatic Process' will send a system generated, real time alert (sms, email etc.) to all entities involved in the particular case. Further, the communication for the appointment of the Arbitrator will be sent immediately and in any case not later than the next working day from the day of picking of the Arbitrator. This communication will be sent by the exchange on which the dispute had taken place, to all concerned entities includi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... used by such Court, or C. c. an application to a Court to set aside such appellate arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996, having been made, but where no stay has been granted by such Court within a period of three months from the date on which the party making that application had received the appellate arbitral award. 8.2.21. Record and Disclosures I. The exchange shall preserve the following documents related to Arbitration: A. the arbitral and appellate arbitral award with acknowledgements, confirming receipt of award by the disputing parties, permanently; B. other records pertaining to arbitration for five years from the date of arbitral award, appellate arbitral award or Order of the Court, as the case may be; and C. register of destruction of records relating to B above, permanently. II. The exchange shall disclose on its website, details of disposal of arbitration proceedings as per format given in Annexure N and details of arbitrator-wise disposal of arbitration of arbitration proceedings as per format given in Annexure O III. The exchanges shall continue to disclose on their website the arbitration awards (issued since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o submit a report of actions taken and evidence of corrections to the Auditors & SEBI within 3 months. This report should include updated Issue-Log to indicate the corrective actions taken, verified by the auditors. II. Auditor Selection Norms A. Auditor must have minimum 3 years of experience in IT audit of Securities Industry participants e.g. stock exchanges, clearing houses, depositories etc. The audit experience should have covered all the Major Areas mentioned under SEBI's Audit Terms of Reference (TOR). B. The Auditor must have experience in / direct access to experienced resources in the areas covered under TOR. It is recommended that resources employed shall have relevant industry recognized certifications e.g. CISA (Certified Information Systems Auditor) from ISACA, CISM (Certified Information Securities Manager) from ISACA, GSNA (GIAC Systems and Network Auditor), CISSP (Certified Information Systems Security Professional) from International Information Systems Security Certification Consortium, commonly known as (ISC)². C. The Auditor should have IT audit/governance frameworks and processes conforming to industry leading practices like CobiT. D. The Audit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem, Access rights and privileges. v. Virus protection - Controls to mitigate the Virus attacks / Outbreaks. vi. Secured (digitally signed) e-mail with other entities like SEBI, other partners vii. Email Archival Implementation viii. Incidences of security violations in last year & corrective actions taken E. Access policy and controls F. Electronic Document controls G. General Access controls H. Performance audit - It must include i. Comparison of changes in transaction volumes since previous audit ii. Review of systems (hardware, software, network) performance over period iii. Review of the current volumes against the last Performance Test performed I. Business Continuity / Disaster Recovery Facilities - It must include i. BCP manual, including Business Impact Analysis, Risk Assessment and DR process ii. Implementation of policies iii. Back-up procedures and recovery mechanism using back-ups. iv. Storage of Back-up (Remote site, DRS etc.) v. Redundancy - Equipment, Network, Site etc. vi. DRS installation and Drills - Management statement on targeted resumption capability (in terms of time required & extent of loss of data) vii. Evidence of achie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed) Auditor Closing Date Date when finding is verified and can be closed Auditor E. The Executive Summary should also include an overall comment from the Auditors to indicate if a follow-on audit is required and the time lines of respective corrective action for non-conformities. F. Further, along with the audit report, the Stock Exchange / Depository shall also submit a declaration from the MD / CEO certifying the integrity and security of IT Systems 9.2. Business Continuity Plan (BCP) and Disaster Recovery (DR) SEBI Circular No. CIR/CDMRD/DEICE/01/2015 dated November 16, 2015 9.2.1. The national commodity derivatives exchanges shall have BCP & DR policy in place and implement the broad guidelines regarding the setting up of Disaster Recovery Site (DRS) and Near Site (NS), Configuration of DRS/NS with Primary Data Centre (PDC), DR drills / Testing, BCP DR Policy as mentioned below: I. The exchanges should have in place Business Continuity Plan (BCP) and Disaster Recovery Site (DRS) so as to maintain data and transaction integrity. II. Apart from DRS, exchanges should also have a Near Site (NS) to ensure zero data loss. III. The DRS should be set up sufficiently aw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of these drills should be documented and placed before the Governing Board of Stock Exchange / Depositories. Subsequently, the same along with the comments of the Governing Board should be forwarded to SEBI within a month of the DR drill. F. The system auditor while covering the BCP - DR as a part of mandated annual system audit should also comment on documented results and observations of DR drills. VII. BCP - DR Policy Document A. The BCP - DR policy of national commodity derivatives exchanges should be well documented covering all areas as mentioned above including disaster escalation hierarchy. B. The exchanges should specifically address their preparedness in terms of proper system and infrastructure in case disaster strikes during business hours. C. Depositories should also demonstrate their preparedness to handle any issue which may arise due to trading halts in stock exchanges. D. The policy document and subsequent changes / additions / deletions should be approved by Governing Board of the exchange and thereafter communicated to SEBI. VIII. Further, the exchanges should also ensure that point VI (F) mentioned above is also included in the scope of its annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c Trading (AT), etc. 9.4.3. Testing of Software In addition to the testing and approval requirements specified through various circulars issued by SEBI on IBT, DMA, STWT, SOR and AT, stock exchanges shall frame appropriate testing policies for functional as well as technical testing of the software. Such framework shall at the minimum include the following: I. Testing in a simulated test environment: National commodity derivatives exchanges shall provide suitable facilities to market participants / software vendors to test new software or existing software that have undergone change. Subjecting the new software or existing software that have undergone change to such testing facility shall be mandatory for market participants, before putting it in use. II. Mock testing A. National commodity derivatives exchanges shall organize mock trading sessions on regular basis, at least once in a calendar month, to facilitate testing of new software or existing software that has undergone any change of functionality, in a close-to-real trading environment. Stock exchanges shall suitably design and plan such mock trading sessions to ensure maximum participation and sufficient trading vo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factory, shall suspend the proprietary trading rights of the broker / trading member for a minimum period of one trading day. 9.4.7. For pre-approval / periodic system audit of Computer-to-Computer Link (CTCL) or Intermediate Messaging Layer (IML), IBT, DMA, STWT, SOR and AT, brokers / trading members shall engage a system auditor with any of the following certifications : * CISA: (Certified Information System Auditors) from ISACA; * DISA: (Post Qualification Certification in Information Systems Audit) from Institute of Chartered Accountants of India (ICAI); * CISM: (Certified Information Securities Manager) from ISACA * CISSP: (Certified Information Systems Security Professional) from International Information Systems Security Certification Consortium, commonly known as (ISC)2. While finalizing the system auditor, stock brokers / trading members shall ensure the system auditor does not have any conflict of interest with the stock broker and the directors/promoters of the system auditor are not directly or indirectly related to the current directors or promoters of stock broker / trading member. 9.4.8. Approval of Software of broker / trading member I. Brokers / tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sought for all new / modified software and will comply with various requirements specified by SEBI or the stock exchange from time to time with regard to usage, testing and audit of the software. C. The absolute liability arising from failure to comply with the above provisions shall lie entirely with M/s (name of the broker / trading member. II. National commodity derivatives exchanges may include additional clauses as deemed necessary in the undertaking. 9.4.11. Sharing of Application Programming Interface (API) specifications by the exchange with brokers / trading members. I. API is an interface that enables interaction of software with other software and typically includes language and message format that is used by an application program to communicate with the operating system or other application program. Brokers / trading members and software vendors require relevant API specifications to facilitate interaction of the developed software with the systems of the stock exchanges. II. Technical Advisory Committee (TAC) had engaged with stock exchanges, software vendors and stock brokers / trading members to review the framework of sharing of APIs by stock exchanges. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence frameworkSEBI Circular No. SEBI/HO/CDMRD/DEICE/CIR/P/2016/0000000044 dated March 29, 2016 9.5.1. SEBI as a member of IOSCO has adopted the Principles for Financial Market Infrastructures (PFMIs) laid down by CPMI -IOSCO and has issued guidance for implementation of the principles in the securities market. 9.5.2. Principle 17 of PFMI that relates to management and mitigation of 'Operational risk' requires that systemically important market infrastructures institutions " should identify the plausible sources of operational risk, both internal and external, and mitigate their impact through the use of appropriate systems, policies, procedures, and controls. Systems should be designed to ensure a high degree of security and operational reliability and should have adequate, scalable capacity. Business continuity management should aim for timely recovery of operations and fulfilment of the FMI's obligations, including in the event of a wide -scale or major disruption." 9.5.3. Commodity derivatives exchanges referred as Market Infrastructure Institutions or MIIs are systemically important market infrastructure institutions. As part of the operational risk management, these MIIs ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ert- Sr. No. Name of the shareholder Category of shareholder Details of holding Number of shares Percentage 1 2 3 UNDERTAKING UNDER REGULATION 21 E. The Managing Director/ Executive Director of the recognized commodity derivative exchange shall submit an undertaking confirming the compliance of the provisions Regulation 21 of Securities Contracts (regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 to SEBI on a quarterly basis within fifteen days from the end of each quarter and to monitor and ensure compliance with the provisions under Chapter - IV of the said SECC Regulations at all times. Annexure B MARKET DEVELOPMENT REPORT OF _________ EXCHANGE FOR THE PERIOD _____ SECTION I 1. STATISTICAL DETAILS - CURRENT FINANCIAL YEAR IMPORTANT: The cumulative figures are for the current Financial Year. Items Apr May Jun Feb Mar Cumulative total for the year No. of Trading days A. Total value of trade (in INR Crores) Total Volume of trade (in MT) Total number of contracts traded B. Agri Commodities Total value of trade (in INR Crores) Total Volume of trade (in MT) Total number of contracts traded C. Non-Agri commodities Total value of trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TO DISRUPTIONS IN TRADING, IF ANY SECTION II 1. COMPLAINTS RECEIVED FROM INVESTORS a. Complaints against brokers Pending at the beginning Received Resolved Pending at the end No. of complaints pending for more than one month and brief reasons thereof b. Complaints referred by SEBI against the brokers Pending at the beginning Received Resolved Pending at the end No. of complaints pending for more than one month and brief reasons thereof 2. COMPLAINTS AGAINST EXCHANGE a. By investors Pending at the beginning Received Resolved Pending at the end No. of complaints pending for more than one month and brief reasons thereof b. By members Pending at the beginning Received Resolved Pending at the end No. of complaints pending for more than one month and brief reasons thereof 3. ARBITRATION (MEMBER VS NON-MEMBER) a. Details of arbitration cases Pending at the beginning Received Awards passed For "X" the amount set aside by the Exchange Pending at the end Details of arbitration cases which are pending for more than three months along with reasons In favour of non-member "X" In favour of member No of cases Amount in INR 4. DETAILS OF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in exchange accredited warehouses 3. TOP 5 OI DETAILS (COMMODITY-WISE) Name of the Commodity Quantity of Highest OI held during the month Total Value of Trades Value of Deliveries Stocks held in exchange accredited warehouses 4. WAREHOUSE (WH) DETAILS Name of the Exchange Number of the Exchange accredited WH WDRA registered warehouse Inspection done Inspection pending 5. WSP DETAILS Name of the Exchange Name of WSPs Number of warehouses of each WSPs Name of commodities stored in warehouses Quantity stored (in MT) Capacity (in MT) No. of WDRA registered WH Annexure C Criteria for Commodity Eligibility for Derivative Products - Template Section I Particulars Weight Sub-score Details Parameter I - Commodity Fundamentals Size of commodity This parameter relates to production, imports, carryover stocks etc… Volume in cash market The daily volumes in the underlying cash/spot/physical market may be a good indicator of the depth Durability and Storability Relates to the durability and duration for which the commodity can be stored Homogeneous/ Standardization Scope for standardization Parameter I Score Parameter II - Ease of doing Business Part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduction Import Total Overall Near Month Overall Near Month In Units * A member's open interest limit at overall (all contracts) level will be either the absolute number indicated above or 15% of the total market wide open position in the commodity, whichever is higher. (As per Clause 5.3 of the SEBI Circular SEBI/HO/CDMRD/DMP/CIR/P/2016/96 dated September 27, 2016) Annexure E Sr. Commodity Unit Client Level Numerical Position Limit for Overall Commodity NON-AGRICULTURAL COMMODITIES 1. Aluminum MT 25,000 2. Brent Crude Oil BBL 400,000 3. Copper MT 7,000 4. Crude Oil BBL 480,000 5. Gold Kgs 5,000 6. Lead MT 3,500 7. Natural Gas mmBtu 6,000,000 8. Nickel MT 1000 9. Silver MT 100 10. Steel MT 120,000 11. Zinc MT 7,000 Annexure F A. Guidelines for Clubbing of Open Positions: 1. When a person is a partner in one or more partnership firms and /or is a director in one or more companies and/or is a manager(karta) of a Hindu Undivided Family (HUF), the total open position of a. the person as an individual operator, b. the firm or firms in which he is a partner ; c. the Company or companies in which he is a director ; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es if they are members of a Federation will not be clubbed with the open interest position of the Federation for the purpose of determining the open interest position of the Federal or vice versa. Similarly, if Govt/RCS nominated directors sits on the Boards of different societies, this will not amount to common interest for the purpose of clubbing of positions. 2. As a practice of good corporate governance, the companies now have independent directors on their Board with no financial interest in the company. Similarly, companies also have Govt/Financial Institutions nominated Directors without any financial interest in the company. In such cases, when the Directors don't have any financial interest in the company. The Commission has taken a view that the position of such companies/corporates may not be clubbed just because they have common directors. C. The above stated guidelines are indicative only. The Exchanges are directed to take suitable measures for clubbing of open positions on the basis of the criteria laid down above and also include other criteria such as PAN, patterns such as 'acting in concert' through common ownership and control structures and any other relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided 7 The Compliance Officer and his contact details (Name, Email Id, Phone number, Address, etc.) 8 Name of Authorized Person, Email-ID, Phone number, Address, etc. 9 a) Date of admission to Exchange b) Date of commencement of trade by the member c) Date of activation (enablement of trading of membership) 10 Branch details to be updated on periodic basis which shall include: a) Address b) Contact Number c) Email-ID 11 Number of clients registered ( to be updated periodically) Annexure I S. No. Parameters 1 Commodity 2 Symbol 3 Launch Date 4 Expiry Date 5 Delivery Logic 6 Lot Size 7 Closing price on Launch Date 8 Total lots traded 9 Total number of trades 10 Total trade volume 11 Total trade value 12 Daily average volume 13 Daily average OI 14 Average volume/ Average OI 15 Final Settlement Price 16 Deliveries 17 Sellers default, if any 18 Total number of members traded 19 Total number of client traded Date and Details 20 Maximum lots traded in a day 21 Maximum volume on a single day 22 Minimum volume on a single day 23 Maximum trade value on a single day 24 Minimum trade value on a single day 25 Maximum open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Categorization One-Day VaR Scaling factor for illiquidity VaR Margin Liquid Securities ( Group I ) Scrip VaR 1.00 Scrip VaR Less Liquid Securities (Group II) Higher of Scrip VaR and three times Index VaR 1.73 (square root of 3.00) Higher of 1.73 times Scrip VaR and 5.20 times Index VaR IIIiquid Securities (Group III) Five times Index VaR 1.73 (square root of 3.00) 8.66 times Index VaR Annexure K Core Settlement Guarantee Fund (Core SGF) Objective of Core SGF 1) Clearing Corporation (CC) shall have a fund called Core SGF for each segment of each Recognised Stock Exchange (SE) to guarantee the settlement of trades executed in respective segment of the SE. In the event of a clearing member (member) failing to honour settlement commitments, the Core SGF shall be used to fulfill the obligations of that member and complete the settlement without affecting the normal settlement process. Corpus of Core SGF 2) The corpus of the fund should be adequate to meet out all the contingencies arising on account of failure of any member(s). The risk or liability to the fund depends on various factors such as trade volume, delivery percentage, maximum settlement liability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibution: Stock Exchange contribution to Core SGF shall be at least 25% of the MRC (can be adjusted against transfer of profit by Stock Exchange as per Regulation 33 of SECC Regulations, which may be reviewed in view of these guidelines). c) Clearing Member primary contribution: If the CC wishes, it can seek risk based contribution from Clearing Members (CMs) of the segment (including custodial clearing members) to the Core SGF subject to the following conditions: * that total contribution from CMs shall not be more than 25% of the MRC, * that no exposure shall be available on Core SGF contribution of any CM (exposure-free collateral of CM available with CC can be considered towards Core SGF contribution of CM), and * that required contributions of individual CMs shall be pro-rata based on the risk they bring to the system. CC shall have the flexibility to collect CM primary contribution either upfront or staggered over a period of time. In case of staggered contribution, the remaining balance shall be met by CC to ensure adequacy of total Core SGF corpus at all times. Such CC contribution shall be available to CC for withdrawal as and when further contributions from CMs are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following order: i. By CC ii. By SE Review of Core SGF 11) The monthly review results shall be communicated to the Risk Management Committee and the Governing Board of the Clearing Corporation. The exception reporting shall be made to SEBI detailing the outcome of the review by the CC Governing Board, including steps taken to enhance the Core SGF. Default waterfall 12) The default waterfall of CC for any segment shall generally follow the following order - i. Monies of defaulting member (including defaulting member's primary contribution to Core SGF(s) and excess monies of defaulter in other segments). ii. Insurance, if any. iii. CC resources (equal to 5% of the segment MRC). iv. Core SGF of the segment in the following order: a. Penalties b. CC contribution to the extent of at least 25% of the segment MRC c. Remaining Core SGF: CC contribution, Stock Exchange contribution and non-defaulting members' primary contribution to Core SGF on pro-rata basis. v. Proportion of remaining CC resources (excluding CC contribution to core SGFs of other segments and INR 100 Crore) equal to ratio of segment MRC to sum of MRCs of all segments.* vi. CC/SE contributi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its liquidity arrangements in order to ensure that its liquid resources are adequate to meet simultaneous default of at least two clearing members and their associates that would generate the largest aggregate liquidity obligation for the CC in extreme but plausible market conditions and compare such obligation with the resources mentioned hereunder: a. Cash b. Committed lines of credit available to CC 16) Reverse stress test: CC shall periodically carry out reverse stress tests designed to identify under which market conditions and under what scenarios the combination of its margins, Core SGF and other financial resources prove insufficient to meet its obligations (e.g. simultaneous default of top N members or N% movement in price of top 2 scrips by turnover or 20% movement in price of top N scrips by turnover etc.) 17) Back testing for adequacy of margins: CC shall daily conduct back testing of the margins collected vis-à-vis the actual price changes for the contractsbeing cleared and settled in every segment to assess appropriateness of its margining models. 18) Adequacy of financial resources: CC shall ensure that it maintains sufficient financial resources to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble MPOR period of the commodity shall be considered (subject to a maximum of 110% of the price movement considered for the commodity under the peak historical return scenario): Scenario 2A: Percentage price rise Scenario 2B: Percentage price fall 2 Augmented historical Exchange shall identify top 10 days during the previous 15 years based on average of absolute percentage price change across all commodities witnessed over the MPOR period. For each of the day, exchange shall identify percentage price change in each commodity (in case of unavailability of prices in any of the commodity on any of the identified days, price change equal to applicable initial margin in the commodity to be considered). All the price movements to be scaled up by 10%. Thus, one scenario corresponding to each of the 10 identified days shall be generated. Hypothetical scenarios 4 Stressed MPOR It shall be assumed that liquidation of open positions would require 5 days and percentage price movement equal to 3.5 times current volatility adjusted for 5 day period (i.e., scaling up by square root of 5) shall be considered. Scenario 4A: Percentage rise over 5 day period Scenario 4B: Percentage fall ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mum 20% haircut. Part C. Coverage To begin with, for each of the scenarios in Part A, Clearing Corporations shall calculate - A. Credit exposure due to simultaneous default of at least 2 clearing members (and their associates) causing highest credit exposure. B. 25% of the credit exposure due to simultaneous default of all clearing members. However, within a year from the deadline of implementation of the circular, for each of the scenarios in Part A, Clearing Corporations shall calculate - A. Credit exposure due to simultaneous default of at least 2 clearing members (and their associates) causing highest credit exposure. B. 50% of the credit exposure due to simultaneous default of all clearing members. Annexure L Serial Number Items/ Issues to be examined and Reported Compliance/Comments 1 GENERAL:‐ Justification for introducing of futures/forward trading in the commodity including its relevance /importance to the economy (in brief) with information for preceding 3 financial years on :‐ a. Its annual production b. Import‐export data c. Details of domestic consumption d. Main area of cultivation e. Patterns of consumption/utilization f. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K MANAGEMENT :- a. Permitted price variation in a day b. Open position limits in respect of client, member and market as a whole c. Checks and balances for high frequency/ Algo trades d. Initial margin, M ‐o‐M margin, and conditions under which special / additional margins could be levied by Exchanges e. Settlement / trade guarantee f. Cost of failed payments / deliveries g. Staggered delivery system Additional Information required in case of proposal for renewal of existing/earlier contracts 6. THE TRACK RECORD OF TRADING IN THE CONTRACT LIKE :‐ a. Trading volume b. Open interest c. Deliveries d. Market participation e. Price movement f. Trade versus delivery g. Order versus actual trade h. Average trade size at Exchange i. Actual production versus actual delivery through exchange trading platform j. Preferred lot size in physical market k. Justification for introduction l. Whether the contract is traded on other exchanges? m. Justification for span of the contract n. Any abnormal trade activity / price movements in previous year o. The educational initiatives taken by the Exchanges for the market participants and` f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip;. months Arbitration appeal cases pending for Arbitration Appellat e Member Client Member Client <4 ≥4 - ≤ 6 >6 <3 ≥3- ≤ 6 >6 N Total (In case of panel of arbitrators, the cases / awards would appear against every member of the panel) (Arrange the arbitrators in descending number of awards passed by them during the period) Annexure P Disclosure of Arbitration and Appellate Arbitration Awards Passed since April 1, 2007 Updated on mm dd yyyy (In excel sheet) (To be updated as soon as a new award is issued) Sl. No. Date of Issue Name of Client Name of Member Initial Arbitration / Appellate Arbitration Link to Award given below Passed during 2007-08 Passed during 2008-09 Passed during 2009-10 Passed during 2010-11 Passed during 2011-12 Annexure Q Stock Broker System Audit Framework Audit Process 1. System Audit of stock brokers should be conducted with the following periodicity a. Annual system audit is prescribed for stock brokers who satisfy any of the following criteria. i. Stock Brokers who use [Computer-to-Computer Link (CTCL) or Intermediate Messaging Layer (IML)] / Internet Based Trading (IBT)/ Direct Market Access (DMA)/ Securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with management comments, within 1 month of submission of report by the auditor. 6. Stock exchange shall ensure that the management of the stock broker provides their comment about the non-compliance / non-conformities (NCs) and observations mentioned in the report. For each NC, specific time-bound (within 3 months of submission of report by the exchange) corrective action must be taken and reported to the stock exchange. The auditor should indicate if a follow-on audit is required to review the status of NCs. 7. In order to ensure that the corrective actions are taken by the stock broker, follow-on audit, if any, shall be scheduled by the stock broker within 6 months of submission of the audit report by the system auditor. 8. The system auditors should follow the reporting standard as specified in Annexure-4 of this Framework for the executive summary of the System Audit report to highlight the major findings of the System Audit. Auditor Selection Norms 1. The Auditor shall have minimum 3 years of experience in IT audit of securities market participants e.g. stock exchanges, clearing corporations, depositories, stock brokers, depository participants etc. The audit experienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ids to specific predefined location for proprietary orders. 2. Risk Management System (RMS) a. Online risk management capability - The system auditor should check whether the system of online risk management (including upfront real-time risk management) is in place for all orders placed through exchange provided terminals. b. Trading Limits -Whether a system of pre-defined limits / checks such as Order Quantity and Value Limits, Symbol wise User Order / Quantity limit, User / Branch Order Limit, Order Price limit, etc.) are in place and only such orders which are within the parameters specified by the RMS are allowed to be pushed into exchange trading engines. The system auditor should check that no user or branch in the system is having unlimited limits on the above parameters. c. Order Alerts and Reports -Whether the system has capability to generate alerts when orders that are placed are above the limits and has capability to generate reports relating to Margin Requirements, payments and delivery obligations. d. Order Review -Whether the system has capability to facilitate review of such orders were not validated by the system. e. Back testing for effectiveness of RMS - W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. Seamless connectivity - Whether stock broker has ensured that a backup network link is available in case of primary link failure with the exchange. b. Network Architecture - Whether the web server is separate from the Application and Database Server. c. Firewall Configuration - Whether appropriate firewall is present between stock broker's trading setup and various communication links to the exchange. Whether the firewall is appropriately configured to ensure maximum security. 6. Access Controls a. Access to server rooms - Whether adequate controls are in place for access to server rooms and proper audit trails are maintained for the same. b. Additional Access controls - Whether the system provides for any authentication mechanism to access to various components of the exchange provided terminals. Whether additional password requirements are set for critical features of the system. Whether the access control is adequate. 7. Backup and Recovery a. Backup and Recovery Policy - Whether the organization has a well-documented policy on periodic backup of data generated from the broking operations. b. Log generation and data consistency - Whether backup logs are maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management and replacement of aging IT infrastructure components have been documented, approved, and implemented. The activities, schedules and resources needed to achieve objectives related to IT infrastructure have been integrated into business plans and budgets. c. IT Infrastructure Availability (SLA Parameters) - The system auditor should verify whether the broking firm has a process in place to define its required availability of the IT infrastructure, and its tolerance to outages. In cases where there is huge reliance on vendors for the provision of IT services to the brokerage firm the system auditor should also verify that the mean time to recovery (MTTR) mentioned in the Service Level Agreement (SLA) by the service provider satisfies the requirements of the broking firm. d. IT Performance Monitoring (SLA Monitoring) - The system auditor should verify that the results of SLA performance monitoring are documented and are reported to the management of the broker. 12. Exchange specific exceptional reports - The additional checks recommended by a particular exchange need to be looked into and commented upon by the system auditor over and above the ToR of the system audit. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem auditor should check whether system of online risk management including upfront real-time risk management, is in place for all orders placed through (CTCL or IML) / IBT / DMA / STWT. b. Trading Limits - Whether a system of pre-defined limits /checks such as Order Quantity and Value Limits, Symbol wise User Order / Quantity limit, User / Branch Order Limit, Order Price limit, etc., are in place and only such orders which are within the parameters specified by the RMS are allowed to be pushed into exchange trading engines. The system auditor should check that no user or branch in the system is having unlimited limits on the above parameters. c. Order Alerts and Reports - Whether the system has capability to generate alerts when orders that are placed are above the limits and has capability to generate reports relating to margin requirements, payments and delivery obligations. d. Order Review - Whether the system has capability to facilitate review of such orders that were not validated by the system. e. Back testing for effectiveness of RMS - Whether system has capability to identify trades which have exceeded the pre-defined limits (Order Quantity and Value Limits, Symbol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Public Key Infrastructure (PKI) based implementation of digital signatures. c. Password Best Practices - Whether there is a system provision for masking of password, system prompt to change default password on first login, disablement of user id on entering multiple wrong passwords (as defined in the password policy document), periodic password change mandate and appropriate prompt to user, strong parameters for password, deactivation of dormant user id, etc. 6. Session Management a. Session Authentication - Whether system has provision for Confidentiality, Integrity and Availability (CIA) of the session and the data transmitted during the session by means of appropriate user and session authentication mechanisms like SSL etc. b. Session Security - Whether there is availability of an end-to-end encryption for all data exchanged between client and broker systems or other means of ensuring session security. Whether session login details are stored on the devices used for IBT and STWT. c. Inactive Session - Whether the system allows for automatic trading session logout after a system defined period of inactivity. d. Log Management - Whether the system generates and maintains l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide high availability and have no single point of failure for any critical operations as identified by the BCP/ DR policy. d. Connectivity with other FMIs - The system auditor should check whether there is an alternative medium to communicate with Stock Exchanges and other FMIs. 12. Segregation of Data and Processing facilities - The system auditor should check and comment on the segregation of data and processing facilities at the Stock Broker in case the stock broker is also running other business. 13. Back office data a. Data consistency - The system auditor should verify whether aggregate client code data available at the back office of broker matches with the data submitted / available with the stock exchanges through online data view / download provided by exchanges to members. b. Trail Logs - The system auditor should specifically comment on the logs of Client Code data to ascertain whether editing or deletion of records have been properly documented and recorded and does not result in any irregularities. 14. User Management a. User Management Policy - The system auditor should check whether the stock broker has a well-documented policy that provides for user manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he additional checks recommended by a particular exchange need to be looked into and commented upon by the System Auditor over and above the ToR of the System audit. 17. Software Testing Procedures - The system auditor should check whether the stock broker has complied with the guidelines and instructions of SEBI / stock exchanges with regard to testing of software and new patches, including the following: a. Test Procedure Review - The system auditor should evaluate whether the procedures for system and software testing were proper and adequate. b. Documentation - The system auditor should verify whether the documentation related to testing procedures, test data, and resulting output were adequate and follow the organization's standards. c. Test Cases - The system auditor should review the internal test cases and comment upon the adequacy of the same with respect to the requirements of the Stock Exchange and SEBI. Annexure 3 ToR for Type III Broker The system auditor shall at the minimum cover the following areas: 1. System controls and capabilities (CTCL/IML Terminals and servers) a. Order Tracking - The system auditor should verify system process and controls at CTC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s / checks such as Order Quantity and Value Limits, Symbol wise User Order / Quantity limit, User / Branch Order Limit, Order Price limit, etc., are in place and only such orders which are within the parameters specified by the RMS are allowed to be pushed into exchange trading engines. The system auditor should check that no user or branch in the system is having unlimited limits on the above parameters. c. Order Alerts and Reports - Whether the system has capability to generate alerts when orders that are placed are above the limits and has capability to generate reports relating to margin requirements, payments and delivery obligations. d. Order Review - Whether the system has capability to facilitate review of such orders that were not validated by the system. e. Back testing for effectiveness of RMS - Whether the system has capability to identify trades which have exceeded the pre-defined limits (Order Quantity and Value Limits, Symbol wise User Order / Quantity limit, User / Branch Order Limit, Order Price limit) and also exceed corresponding margin availability of clients. Whether deviations from such pre-defined limits should be captured by the system, documented and cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m should allow only authorized users to set the risk parameter. The System should also maintain a log of all the risk parameter changes made. d. Information / Data Feed - The auditor should comment on the various sources of information / data for the algo and on the likely impact (run away /loop situation) of the failure one or more sources to provide timely feed to the algorithm. The system auditor should verify that the algo automatically stops further processing in the absence of data feed. e. Check for preventing loop or runaway situations - The system auditor should check whether the brokers have real time monitoring systems to identify and shutdown/stop the algorithms which have not behaved as expected. f. Algo / Co-location facility Sub-letting - The system auditor should verify if the algo / co-location facility has not been sub-let to any other firms to access the exchange platform. g. Audit Trail - The system auditor should check the following areas in audit trail: i. Whether the audit trails can be established using unique identification for all algorithmic orders and comment on the same. ii. Whether the broker maintains logs of all trading activities. iii. Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty (CIA) of the session and the data transmitted during the session by means of appropriate user and session authentication mechanisms like SSL etc. b. Session Security - Whether there is availability of an end-to-end encryption for all data exchanged between client and broker system or other means of ensuring session security. Whether session login details are stored on the devices used for IBT and STWT. c. Inactive Session - Whether the system allows for automatic trading session logout after a system defined period of inactivity. d. Log Management - Whether the system generates and maintains logs of number of users, activity logs, system logs, number of active clients. 8. Database Security a. Access - Whether the system allows CTCL or IML database access only to authorized users / applications. b. Controls - Whether the CTCL or IML database server is hosted on a secure platform, with username and password stored in an encrypted form using strong encryption algorithms. 9. Network Integrity a. Seamless connectivity - Whether the stock broker has ensured that a backup network link is available in case of primary link failure with the exchange. b. Network Architecture - Whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ystem auditor should verify whether aggregate client code data available at the back office of broker matches with the data submitted / available with the stock exchanges through online data view / download provided by exchanges to members. b. Trail Logs - The system auditor should specifically comment on the logs of Client Code data to ascertain whether editing or deletion of records have been properly documented and recorded and does not result in any irregularities. 15. User Management a. User Management Policy - The system auditor should verify whether the stock broker has a well-documented policy that provides for user management and the user management policy explicitly defines user, database and application access matrix. b. Access to Authorized users - The system auditor should verify whether the system allows access only to the authorized users of the CTCL or IML system. Whether there is a proper documentation of the authorized users in the form of user application approval, copies of user qualification and other necessary documents. c. User Creation / Deletion - The system auditor should verify whether new user's ids should be created / deleted as per CTCL or IML gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or should also review the adequacy of tests. b. Documentation - The system auditor should review documented testing procedures, test data, and resulting output to determine if they are comprehensive and if they follow the organization's standards. c. Test Cases - The system auditor should review the test cases and comment upon the adequacy of the same with respect to the requirements of the Stock Exchange and various SEBI Circulars. Annexure -4 Executive Summary Reporting Format I. For Preliminary Audit Audit Date Observation No Description of Finding Department Status / Nature of Findings Risk Rating of Findings Audit TOR Clause Audited By Root Cause Analysis Impact Analysis Suggested Corrective Action Deadline for the Corrective Action Verified By Closing Date Description of relevant Table heads 1. Audit Date - This indicates the date of conducting the audit. 2. Description of Findings/ Observations - Description of the findings in sufficient detail, referencing any accompanying evidence (e.g. copies of procedures, interview notes, screen shots etc.) 3. Status/ Nature of Findings - the category can be specified for example: a. Non-Compliant b. Work ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve cyber resilience. Cyber Resilience is an organization's ability to prepare and respond to a cyber-attack and to continue operation during, and recover from, a cyber-attack. *Confidentiality refers to limiting access of systems and information to authorized users, Integrity is the assurance that the information is reliable and accurate, and Availability refers to guarantee of reliable access to the systems and information by authorized users Governance 2. As part of the operational risk management framework to manage risk to systems, networks and databases from cyber-attacks and threats , MII should formulate a comprehensive cyber security and cyber resilience policy document encompassing the framework mentioned hereunder. The policy document should be approved by the Board, and in case of deviations from the suggested framework, reasons for such deviations should also be provided in the policy document. The policy document should be reviewed by the MII's Board at least annually with the view to strengthen and improve its cyber security and cyber resilience framework. 3. The cyber security and cyber resilience policy should include the following process to identify, assess, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies of its employees, outsourced staff, and employees of vendors, members or participants and other entities, who may have access or use systems / networks of MII, towards ensuring the goal of cyber security. Identity 11. MII should identify critical assets based on their sensitivity and criticality for business operations, services and data management. To this end, MII should maintain up-to-date inventory of its hardware and systems, software and information assets (internal and external), details of its network resources, connections to its network and data flows. 12. MII should accordingly identify cyber risks (threats and vulnerabilities) that it may face, along with the likelihood of such threats and impact on the business and thereby, deploy controls commensurate to the criticality. 13. MII should identify critical assets based on their sensitivity and criticality for business operations, services and data management. To this end, MIIshould maintain up-to-date inventory of its hardware and systems, software and information Security. Protection Access Controls 14. No person by virtue of rank or position should have any intrinsic right to access confidential data, app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Physical access to the critical systems should be restricted to minimum. Physical access of outsourced staff / visitors should be properly supervised by ensuring at the minimum that outsourced staff / visitors are accompanied at all times by authorized employees. 25. Physical access to the critical systems should be revoked immediately if the same is no longer required. 26. MII should ensure that the perimeter of the critical equipments room are physically secured and monitored by employing physical, human and procedural controls such as the use of security guards, CCTVs, card access systems, mantraps, bollards, etc. where appropriate. Network Security Management 27. MII should establish baseline standards to facilitate consistent application of security configurations to operating systems, databases, network devices and enterprise mobile devices within the IT environment. The MII should conduct regular enforcement checks to ensure that the baseline standards are applied uniformly. 28. MII should install network security devices, such as firewalls as well as intrusion detection and prevention systems, to protect its IT infrastructure from security exposures originating from i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy for disposals of the storage media and systems. The data / information on such devices and systems should be removed by using methods viz. wiping / cleaning / overwrite, degauss and physical destruction, as applicable. Vulnerability Assessment and Penetration Testing (VAPT) 40. MII should regularly conduct vulnerability assessment to detect security vulnerabilities in the IT environment. MII should also carry out periodic penetration tests, at least once in a year, in order to conduct an in-depth evaluation of the security posture of the system through simulations of actual attacks on its systems and networks. 41. Remedial actions should be immediately taken to address gaps that are identified during vulnerability assessment and penetration testing. 42. In addition, MII should perform vulnerability scanning and conduct penetration testing prior to the commissioning of a new system which offers internet accessibility and open network interfaces. Monitoring and Detection 43. MII should establish appropriate security monitoring systems and processes to facilitate continuous monitoring of security events and timely detection of unauthorized or malicious activities, unauthorize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evel among the employees and outsourced staff, vendors, etc. on IT / Cyber security policy and standards. Special focus should be given to build awareness levels and skills of staff from non-technical disciplines. 54. The training program should be reviewed and updated to ensure that the contents of the program remain current and relevant. Periodic Audit 55. The Terms of Reference for the System Audit of national commodities derivatives exchange shall be accordingly modified to include audit of implementation of the aforementioned areas. List of Circulars S. No. Date Title 1. Oct 01, 2015 Comprehensive Risk Management Framework for National Commodity Derivatives Exchanges 2. Oct 21, 2015 Risk Management for Regional Commodity Derivatives Exchanges 3. Nov 16, 2015 Investor grievance redressal system and arbitration mechanism 4. Nov 16, 2015 Annual System Audit and BCP DR 5. Nov 26, 2015 Timelines for Compliance with various provisions of Securities Laws by Commodity Derivatives Exchanges 6. Dec 09, 2015 Monthly Development Report for Commodity Derivative Exchanges 7. Dec 11, 2015 Testing of software used in or related to Trading and Risk Management 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivatives - Miscellaneous norms 32. Sep 26, 2016 Circular on Investor Protection Fund (IPF) and its related matters 33. Sep 27, 2016 Revised Warehousing Norms in the Commodity Derivatives Market for Agricultural and Agri-processed Commodities Traded on the National Commodity Derivatives Exchanges 34. Sep 27, 2016 Position Limits for Commodity Derivatives, clubbing of open positions, penalties for violation of position limits 35. Sep 27, 2016 Portfolio Management Services (PMS) in Commodity Derivatives Market 36. Sep 27, 2016 Sharing of Information in case of Declaration of Member as Defaulter in case of Multiple Membership 37. Sep 27, 2016 Disclosure by Commodity Derivative Exchanges on their Websites 38. Sep 27, 2016 Broad Guidelines on Algorithmic Trading for National Commodity Derivatives Exchanges 39. Sep 28, 2016 List of Commodities Notified under SCRA 40. Sep 28, 2016 Introduction of Options in Commodity Derivatives Market 41. Oct 14, 2016 Bullion as collateral 42. Dec 02, 2016 Spread margin benefit 43. Dec 16, 2016 Applicability of Principles of Financial Market Infrastructures (PFMIs) on Commodity Derivatives Exchanges 44. Jan 20, 2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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