CONTINUOUS FUNDING SYSTEM (CFS) MK II

Working Paper
Criteria for Granting Authorized Financier Status (Annexure A)
Financing Agreement between NCCPL and AFs (Annexure B)
NCCPL Regulations Governing CFS MKII (Annexure C)
Margin Regime Under CFS Mk II (Annexure D)
VAR BASED MARGINING SYSTEM (Annexure E -1)
VALUATION OF SECURITIES WHICH ARE ELIGIBLE TO BE HELD AS SECURITY (Annexure E -2)
NETTING REGIME FOR EXPOSURE PURPOSES (Annexure E -3)
MARK-TO-MARKET LOSS COLLECTION AND PROFIT DISTRIBUTION (Annexure E -4)
Special Margins (Annexure E -5)
POSITION LIMITS ACROSS MARKETS (Annexure E -6)
RISK MANAGEMENT OVERVIEW (Annexure E -7)
Bank Guarantee (Annexure F)
Default Regulations Governing CFS MKII (Annexure G)
Default Management � CFS-MK II (Annexure X)

SECURITIES & EXCHANGE COMMISSION OF PAKISTAN

(Securities Market Division)

NIC Building, Jinnah Avenue, Blue Area, Islamabad

 ****

June 28, 2007

 WORKING PAPER

 CONTINUOUS FUNDING SYSTEM (CFS) MK II

1.    Introduction to CFS Mk II

To facilitate transparent and efficient financing for the market, SECP proposes the authorization of direct CFS finance by eligible participants such as brokers, banks and NBFCs etc. Accordingly, to ensure a level playing field for investors and brokers of three stock exchanges, a centralized CFS Mk II will be developed at the National Clearing Company of Pakistan (NCCPL). This arrangement would benefit investors, financees as well as financiers who would not need to acquire Authorized Financier (AF) status of each stock exchange to extend financing. As a result financiers would have the capacity to lend money to broker financees at any stock exchange in a geographically neutral manner without incurring different levels of risk as the risk management, and hence the risk, will be concentrated in NCCPL.

CFS Mk II will create an institutional bulk pool of funds providing liquidity to market at the retail level. This pool of funds, administered by NCCPL, shall ensure availability of funds for at least 90 days. The participating institution�s risk will essentially be covered except that instead of brokers being the obligor and providing personal commitment, the institutions will now take NCCPL risk and the risk inherent in the scrip.

CFS Financiers and Financees will have NCCPL�s automated terminals installed in their premises. CFS Financiers will input, on real time basis, offers of finance on these automated terminals for shares that they want to finance at desired rates of return/markup. CFS Financees, essentially brokers, may either accept the offer on the screen or put in his own bid for specified scrip at a specified rate, which the AF can in turn accept thus concluding the contract.

 The CFS Financiers under CFS Mk II will essentially take the same risks as they do currently on other modes of broker financing except that the broker�s personal commitment will be missing i.e. risk will essentially be on CFS eligible shares held by the AF in its own name. Furthermore, the Financier will have a lien on the VAR margin and the special margins that are being collected and held by NCCPL from the Financee. Another important difference being that value of shares held as margin / collateral will be based on VaR methodology and higher margins will be held in the shares where the risk is greater. Currently AF take flat margins irrespective of the risk. The most important difference will be that mark to market losses along with special margin will be collected on a daily basis by NCCPL without any hassle to the FIs and the same shall be held for the benefit of the AF.

2.  Salient Features of CFS Mk II

2.1       Eligible Participants � Financier

�        All eligible financiers, willing to provide CFS Mk II financing, will acquire status of AF, which status will be granted by NCCPL (BOD) in accordance with the criteria laid down for this purpose (Annexure A). The said criteria shall be approved by SECP. There will be two categories of AFs:

1.      Non Broker AFs (NBAF)

2.      Broker AFs (BAF)

�        All Non Broker FIs seeking AFs status will pay to NCCPL a membership fee of PKR 2 million (Rs. 1 million being security deposit and refundable at the time of discontinuation of AF status and 1 million as initial CFS trading fees) to obtain AF status. Annually, AF status shall be renewed on payment of trading fee of Rs. 0.5 million.

�        NCCPL shall enter into a Financing Agreement with all AF and shall take irrevocable undertakings from each Financier that they shall meet their commitment to NCCPL in the CFS market at all times. This will be embodied in a formal agreement between NCCPL and the AF (Annexure B). This Agreement will cover pre-settlement risk of non performance on acceptance of finance offers and will document AFs acceptance of NCCPL default procedures in the CFS market.     

�        AF premises will be outfitted with NCCPL�s automated terminal, through which finance offers may be made on real time basis. AF will be responsible to the NCCPL for all offers made through its dedicated terminal which are accepted by the market. Through these terminals AFs can offer finance at given rates for specified scrips, withdraw such offers, and/ or change the rate of finance offered till such time that the offer is accepted. Once accepted the offer becomes irrevocable and the contract becomes firm. Each AF will use a code for making entries into the system which will be linked to the UIN and will be part of the UIN system.

            Brokers may also provide finance under CFS Mk II provided they obtain AF status and enter into the required agreement. However, broker will not pay any membership fee nor the annual trading fee.

�        All AFs will have to adhere to NCCPL Regulations for CFS Mk II (Annexure C). These CFS Mk II Regulations shall have an overriding effect on any or all other regulations of the stock exchanges. Further, the exchanges will amend their regulations to ensure that:

�      Cross default provisions apply.

�      Common assets of members to be allocated between market based on the exposure to each market at the point of default.

2.2              Eligible Financiers to CFS Market:

�                 All Scheduled Banks

�                 Mutual Funds

�                 Special purpose CFS financing Mutual Funds;

�                 NBFCs

�                 Leasing Companies

�                 Modarabas

�                 Insurance companies

�                 DFIs

�                 Brokers, both corporate and individual, will provide finance for and on behalf of their clients (in which case Broker must use the client code and have UINs registered for the client) whose funds are being placed in the CFS market or for their own account.

�                 Public or private limited companies may also fund the market using their unique codes on UIN system through brokers or banks only (new cash management product will be the vehicle).

�                 Any other Corporate Entity as may be approved by the NCCPL (BOD), with the consent of SECP, such as pension funds, EOBI etc

2.3   Eligible Participants � Financee

• Brokers of Karachi, Lahore & Islamabad stock exchanges will be the only takers of finance from CFS market.
• Brokers will have access to finance for and on behalf of their clients and for their own account. All acceptance of offers of finance shall be executed by inserting unique client codes, which are registered on the UIN system, for their client as well as for the broker.
• NCCPL�s computer systems will conduct pre-CFS trade verification that each CFS financee i.e. at the client level, has a ready long position on that day before it allows CFS trade to take place and ensure that no financing is allowed against shares held outside the CFS system. The only exception would be where the CFS contract is being rolled over on the expiry of 22 working days. In this case the NCCPL system shall ensure that the number of shares being rolled over are indeed the balance remaining from the original contract which is expiring on that day. Financee will refer to the client�s expiring contract to enable NCCPL to check and allow the exception.
•  NCCPL computer systems will ensure, though pre-trade verification, that all client codes used in the CFS Market i.e all financiers and financee clients, are registered on the UIN data base.

2.4   Modus Operandi for CFS- MK II

• CFS Financiers shall input offers of finance on NCCPL terminal in the form of number of specified shares required to be financed together with required rate of return. Rate of return will be determined as the rate which adequately prices risk inherent in the share and shall be determined exclusively by each AF. All offers and bids will be transparently displayed on NCCPL�s system.
• Financees will have access via the NCCPL terminal to all unmatched offers available on each share and will accept Financiers� offers directly through NCCPL�s automated terminals. On matching bids and offers, CFS contract will be confirmed and become irrevocable. Financee will be able to place his own bid for acquiring financing which Financiers may accept for financing in a transparent and open manner.
• The trading will be done on undisclosed basis in CFS MK � II.
• The NCCPL shall be the counterparty with limited liability which shall be determined by its Regulations.
• NCCPL shall be the counterparty for settlement of 2^nd ticket and shall take over responsibility for delivery of shares to the Financee on 2^nd ticket buy. On the second ticket sale,  where the AF wants the cash for his shares, NCCPL on settlement shall pay to AF the agreed cash in return for shares.
• NCCPL shall ensure that on settlement of 1^st ticket sale, shares tendered by the Financee are coming from the Ready market, i.e from the system, and not being tendered directly by the financee through the CDC.
• An independent continuous transactional and systems audit shall be conducted for CFS Mk II and reports shall be made public on a timely basis.

2.5   Certainty of Funding

• CFS Financiers will irrevocably commit to a given amount of funding to CFS market. The Financier will have 22 working days to fully lend out his initial commitment. CFS financing once committed cannot be withdrawn totally or partially for next 90 calendar days period. Any withdrawal shall require a written 90 calendar days notice, to NCCPL, to run from date of receipt of notice, which information will be disseminated to public on a daily basis.

• The financier will be locked in on each contract for 22 working days  from the date that the contract is settled.

• AF may provide additional funds over and above the committed amount. No notice will be required and the AF will be allowed to enhance its exposure to CFS markets.

•  If an AF wishes to withdraw the additional funds that it provides to the market, over and above the firm commitment, an advance notice of 22 working days for its withdrawal will be required to be served to NCCPL, to run from date of receipt of notice, which information will be disseminated to public on a daily basis.

• CFS Financier shall commit to be fully lent out vis a vis its committed amount. An average disbursement of 90% of commitment during each calendar month will be considered as having fully met this commitment.

• Should Financier not meet his funding commitment, a penalty of 2% per annum, on average shortfall from full commitment during the past month, will become payable to NCCPL.

• No penalty shall be applicable where AF�s offer for finance at agreed minimum commitment rate (see 2.8 below) remains unaccepted, causing AF to be under lent.

• Each CFS Financier shall commit to finance only the eligible CFS shares. Amounts invested in any eligible share shall be at the financiers� discretion. This will ensure that AFs are financing those scrips in which they feel comfortable from a risk point of view.

• Should AF not provide funding as agreed or is indulging in manipulative trade practices, penalties may be imposed and  his AF status may also be rescinded or suspended after following due process. (to be prescribed)

• All AFs committed lines will have to be taken up at the asking price before allowing other AFs to provide funds over and above the committed lines. This will incentives AF to commit higher lines to the market.

2.6   Important Statistics to be made available to the general public

Following statistic will be made available to public on daily basis by NCCPL which inter-alia include the following:

�        Number of financiers in the CFS market will be disclosed together with the total amount of financing provided for all CFS eligible shares.

�        Total amount of committed funding to market after reporting day�s withdrawal;

�        Total disbursements in the market and per eligible scrip;

�        Unutilized committed lines;

�        Total funds due to be released in next 3 days on maturity of CFS contracts i.e. on expiry of 22 working days which may be rolled over.

�        Total amount of facility scheduled to be withdrawn from system over next 90 days as per notices received, together with the dates when same will be withdrawn.

�        Total amount of CFS released in the day

�        Total amount of CFS released for each CFS eligible share.

�        Total funding provided in each share. Percentage of CFS funds invested in each of the eligible shares.

�        Total amount of CFS funds released during the day and reinvested.

�        Weighted average rate of interest charged in each of the eligible scrips for the day.

�        Total amount availed by the financees and the number of financees in the market place.

2.7   CFS Contracts

• Each new CFS contract will be for 22 working days. Financee may release availed CFS funds at any time during currency of contract i.e. within 22 working days, on selling his position in ready market or wanting to take delivery. Financee shall be allowed to release the contract on same day that it is written. Same day release will cause a one day charge of funds to be imposed as penalty to be paid to the financier. This will be deducted by NCCPL from financee margin amount and paid to the AF whose contract was released same day.
• On expiry of 22 working days, CFS contract will automatically be liquidated and finance forced release, forcing Financee to take delivery or other appropriate action. No extension of CFS contract shall be allowed beyond 22 working days.  On the 21^st or 22^nd working day the Financee may enter into another CFS contract for the remaining balances of shares from the original contract for another period of 22 working days. This new contract will be at the then prevailing interest rate and could be from one or more AFs. Please note this facility is ONLY available on the 21^st or 22^nd working days.
• Financee may before the expiry of original contract i.e before completion of 22 working days, partially or totally release the contract to enable him to settle his sales in the Ready Market. Please note that the second ticket purchase contract, will be reduced where partial CFS contract is released. The NCCPL system shall ensure that all partial releases from the 2^nd purchase ticket are tracked so that a proper status is maintained of all open 2^nd ticket purchase contracts.
• When CFS funds are released, Financier will re-offer same at the then prevailing rate of interest to market at large through the system.
• If settlement day on forced release of contract i.e. 22^nd working day +3 days, is a holiday, then CFS contract shall be settled on next working day and mark-up shall be paid upto date of settlement.
•  As per ready market, settlement of CFS contracts will be on T+3 or as prescribed by SECP.

2.8       Cost of Finance

�              Cost of finance will be determined by market forces of demand and supply.

�              Lending rates will have a floor (commitment rate) of ruling 30 days KIBOR plus 4%.  KIBOR shall be taken as announced by the Financial Market Association at the close of  preceding working day.

�              All AFs can, at their discretion, lend below the commitment rate. It is confirmed that there is no compulsion on AFs to lend below commitment rate.

�              Rate of interest applicable to each share, at which the CFS funds are lent, will be determined by each individual AF based on its own assessment of risk inherent in that share at that point in time.

�              All AFs shall pay prevailing transaction costs to NCCPL and CDC for all CFS related transactions.

2.9   Capital Adequacy

For Broker AF

�              Open CFS second ticket sale position of Broker AF in CFS Market will not be included in calculating the Capital Adequacy Limit provided the CFS Financed Securities are kept in a blocked CDC CFS Account.

�              Where Broker AF deposit CFS financed shares in the required blocked CDC account but pledges the proprietary shares to the Stock Exchange, then the open second ticket sell position upto the extent of pledged shares, shall be included in his exposure calculations for capital adequacy purposes.

For Broker Financee

�              Currently total broker exposure is limited to 25 times of net capital balance. This will remain applicable to brokers who have outstanding trades on ready, future or CFS markets. Second ticket purchase which remains outstanding for broker Financee in CFS market will impact his capital adequacy calculations.

�              Every Broker Financee shall maintain its  leverage position in respect of CFS and other derivatives such that it does not exceed 15 times  Net Capital Balance,

2.10   Financier Risk Management

• As CFS market is a separate market, the NCCPL will collect exposure margin and mark to market losses, based on prevalent margin regime from broker CFS Financees and from all AFs.
• All such CFS margins will be held by the NCCPL, segregated from Ready and Future margins, for benefit of the CFS market participants, primarily the Financier. Such margins shall primarily compensate CFS Financier in event of CFS Financee default in settlement of its obligation under second ticket purchase and vice versa where AF defaults.
• Instead of assuming broker risk, AFs involved in CFS will now take the NCCPL institutional risk to collect the required margin and mark-to-market losses upto the point of default. Regular audits of NCCPL shall be conducted to ensure that all margins are properly collected.
• CFS Financees� losses in CFS financed shares will be netted off against profits in other CFS financed shares. Net losses will be collected in cash.(please see new mark-to-market regime)
• Special margins shall be collected by NCCPL from Financees and from BAF (where CFS financed shares are pledged to Stock Exchange)

2.11    Separate Markets

• As CFS, Future and Ready markets have been separated, no netting is allowed between these markets. As regards the netting regime applicable to CFS Mk II (please see Annexure D). All exposure margins and mark to market losses and special margins collected in the CFS market will be held by NCCPL, for benefit of participants of that market, primarily the Financier.

2.12   Risk Management

• New Risk Management Regimes that has been implemented at the stock exchanges w.e.f March 5, 2025 will be applicable to CFS MKII. Detailed papers on each section are attached as Annexures:

-         VaR Based Margining   - (Annexure E 1)

-         Valuation of Shares based on VaR- (Annexure E 2)

-         Netting Regime for Exposure Purposes- (Annexure E 3)

-         Mark-to-Market Loss Collection and profit Distribution - (Annexure E 4)

-         Special Margins- (Annexure E 5)                                                         

-         Position Limits in the Markets- (Annexure E 6)

-         Risk Management Overview (Annexure E 7)

Each of these annexures either totally or have sections that apply to CFS MKII Markets and the same shall be applicable.

• In order to change the parameters on which applicable VaR is being calculated or revise  special margins, or for any other changes to be introduced in the risk management mechanism, a Risk Management Committee (RMC) will be formed. The RMC would have adequate representation of the lending financial institutions. This proposed Committee should have members by designation.

2.13   Scope of Finance � Shares Eligible for Finance

�        SECP shall approve the �Eligibility Criteria for CFS Financed Shares� prepared by NCCPL, in consultation with the exchanges, and approved by NCCPL BOD. Accordingly CFS shall only be available in the prescribed eligible shares which meet the criteria and have been recommended by NCCPL BOD and approved by SECP. This list will be reviewed 15 days before each quarter end. The new list shall become effective from the start of the quarter. All AFs shall commit to finance these eligible shares only. Financiers shall be at liberty to finance any or all of the eligible shares in any proportion that they may deem fit. AF can finance shares they feel comfortable with and can change their CFS portfolio at their sole discretion.

�        The said Eligibility Criteria to be developed by NCCPL  shall consider inter-alia the following:

�         Companies that have average daily Impact Cost of less than one percent, based on previous three months daily impact cost and on an order size of Rs. 500,000;

�         Companies should have traded on more than 90% of the trading days during last three months;

�         Companies with free float of more than 20%  of issued capital or 45 million free float shares whichever is lower.

�         Mutual Funds units/securities are not eligible for CFS financing.

2.14   Margins Required from Financier

• All AFs shall deposit margins as applicable to the Ready Market and pay Mark to Market losses to NCCPL from the date of transaction till date of settlement to cover the settlement risk.
• On settlement all AFs shall not be required to place any margin or mark to market losses with the NCCPL provided the CFS financed shares are held in AFs name in a separate CDC blocked account opened for the purpose of settlement of CFS transactions through NCSS. All other activities i.e. inter account movement, pledge etc. will be prohibited through such CDC account.
• Only in case of broker proprietary position, broker AF shall have the option to pledge his proprietary CFS financed shares (lying in a CDC blocked account) for the purposes of pledge against exposure with the Stock Exchanges. In this case, the Broker AF shall pay VAR based exposure margin as applicable to Ready market plus Special margins plus daily mark to market losses on all open CFS second ticket sale contracts with respect to the pledged CFS securities to NCCPL.
•  Upon settlement on T+3, the CFS financed shares shall automatically be transferred to a separate CDC blocked account in the name of the AF and  the margins held against CFS financing for the first 3 days shall be released and no further margin shall be required.
• Broker and Non Broker AFs shall be required to deposit exposure margins and mark to market losses on the day that its CFS offer is accepted on NCCPL terminal. Thereafter daily Mark to Market losses shall be collected till settlement. The margins will be held till such time that settlement takes place.
• Similar to non-broker AFs, broker AFs will be required to open a separate CDC account linked with a separate NCC CM account for the settlement of CFS transactions through NCSS.  All such accounts will be in the name of the Broker AF or his client (where client funds are used).
• No IDS facility shall be allowed to FIs in the stock market where they fund the CFS market through brokers. It is clarified that FIs will not be allowed to provide funds in CFS market unless they become AFs. In case of  small FIs, they may provide funds through banks cash management products, not directly or through the brokers.

2.15   Margins Required from Financee

• CFS Financee Member shall pay VAR based exposure margins and mark to market losses and special margins as currently applicable under the new RMS and amended from time to time on all open second ticket purchases.

• Deposit against exposure will be accepted in the shape of eligible shares(at the agreed valuation), cash or any other acceptable security duly approved by NCCPL BOD and SECP,  such as T Bills, PIBs or bank guarantee (in agreed format) to cover Financee exposure in CFS Mk II market.

• CFS related margins i.e. exposure margin, mark to market losses and special margin will be held by the NCCPL and thus remain segregated from ready and future market margins held by the exchanges. CFS related margins will be utilized for benefit of CFS Financiers only on default of the financee or vice versa.

• CFS Financees� losses at the client level in CFS financed shares will be netted off against profits in that clients other CFS financed shares. Net losses will be provided/funded by the financee member on a daily basis.

• Mark to market profit and loss, at the client level and proprietary positions on all unsettled CFS finance positions i.e. second ticket purchase, shall be netted across securities for the same client. The net loss of the client or proprietary position will be paid by the Financee Broker to NCCPL on the same day or prior to opening of next trading day.

• Mark-to-market losses should be collected in the form of cash only.

2.16   Valuation of Collateral held by the NCCPL as Margin

(a)  Valuation of Shares of Listed Companies:

• Please see attached Annexure E 2 for valuation of shares of listed companies.

 (b) Treasury Bills and PIBs

• Treasury Bills and PIBs shall be valued at the daily market value based on the Financial Market Association (FMA) data provided to Reuters. These will be introduced later on.

(c ) Bank Guarantees

• Bank guarantees (callable without any conditions and payable on demand) shall be accepted if these are issued by banks that have a minimum of an Investment Grade rating issued by Moody�s or Standard & Poor; or a minimum rating of AA issued by PACRA or JCR-VIS. Detailed procedures shall be developed by NCCPL for the administration of such guarantees (an automated system to generate alerts well in advance to the expiry period of such guarantee). (Annexure F).

• NCCPL BOD shall approve all Banks whose guarantee will be acceptable.

2.17     Default Procedure (Draft- Detailed procedures are being formulated)

Refer Annexure �X� for Default Management in CFS Mk II.

2.18     Position Limits:

• In order to check undue concentration in a particular security and to prevent cornering/manipulation, scrip-wise position limit should be imposed in the CFS Mk II market as follows:

• CFS Financee position in a scrip at any point in time shall be made up as follows: -

(i)         All released but not settled CFS 2^nd ticket purchase contracts.

(ii)        All unreleased 2^nd ticket purchase contracts.

2.19     CFS Financed Shares

• CFS financed shares will be held in a separate CDC account, in the name of Financier, and shall be blocked, with the irrevocable instructions to deliver these shares to NCCPL against settlement of 2^nd ticket purchase contracts. This will be an automated process whereby shares acquired through CFS market will be delivered to the special account (NCCPL to ensure this). This will mitigate Financier�s delivery risk and eliminate need for Financier to deposit mark-to-market losses or exposure margins with the NCCPL.
• On release of CFS financing, the shares held in the special CDC blocked account shall be released directly to NCCPL in settlement on the settlement date.

2.20     Corporate Action in CFS Shares

• Detailed procedure following corporate actions in a CFS financed security needs to be worked out by NCCPL in co-ordination with the exchanges. (A detailed paper will be provided separately) .

2.21     Release of CFS Finance by Financee

• All CFS Financees shall release CFS funds during Ready market hours. CFS market will remain open one hour after Ready market closure. This will provide Financiers sufficient opportunity to re-offer released finance to other potential Financees and put his money at work.
• As soon as CFS Financee releases his position, which could be at any time during the day or after the first day (ie. the day CFS transaction has been executed) till the 22^nd working day of the contract, the Financier will be required to offer the released funds to market through the NCCPL terminal at a rate to be determined by the Financier before the closure of trading day.
• In case of release of CFS financing, the system/NCCPL terminal should automatically display the same on real time basis for information of the financier and the market.

2.22   Settlement

• CFS Financier shall offer finance on CFS MKII market and resulting transactions shall be settled through NCCPL as per current practice. AFs participating in CFS market shall be directly responsible for its clearing & settlement obligations to NCCPL. For this purpose all AFs shall be required to become Clearing Members (CMs) of NCCPL.
• Settlement of CFS contract, on expiry or on being released, will take place as per current practice under T+3 regime.

2.23     CFS Protection Fund:

• A CFS MK II Protection Fund (CFS Mk II PF) is proposed to be created to meet any losses that the Financier may incur in case of a default. This Fund shall be maintained / managed by NCCPL.

• Structure and Funding of CFS Mk II PF :

�             Proceeds  of one time AF fee � Rs.1.0 m;

�             Annual AF renewal fee of Rs. 0.5 m;

�             Seed capital to be contributed by the exchanges : KSE Rs. 50 million, LSE Rs. 25 million and ISE Rs.10 million

�             A protection levy of 0.003% of daily CFS trade value collected directly by the NCCPL from Financiers as laga. 50% of this levy will be treated as laga and used as such by the exchange and 50% will fund CFS Protection Fund.

�             2% penalty on Financier based on amount of commitment under lent to be imposed by the exchange

3.    Time Frame for Implementation � Critical path

Please see Annexure Y.

July 15, 2024 is proposed final going live date.

Annexure A

 Criteria for Granting Authorized Financier Status

• Minimum commitment of funds to CFS Mk II market - Rs. 200 million for FIs and mutual funds and Rs. 20 million for brokers;

• Entity must have a short term rating of A- 3. BBB short term rated banks and financial institutions may also be accepted in exceptional circumstances where the banks have a track record of funding the equity market. Brokers are not required to be rated;

• Given management capability to operate NCCPL automated terminal;

• Minimum equity of Rs. 400 million (other than broker financiers);

• Demonstrated capital market capability;

• Non Broker AF shall be required to comply with their applicable regulations relating to minimum capital requirements as prescribed under law governing their respective entity

Annexure B

Financing Agreement between NCCPL and AFs

 
Under development by NCCPL and would be provided later.

Annexure C

NCCPL Regulations Governing CFS MKII

     Under development by NCCPL and would be provided later.

Annexure D

Margin Regime Under CFS Mk II

For Authorized Financiers

1.      AF shall deposit VAR based exposure margins as applicable to Ready Market margin regime (special margins are not applicable to AF) on the first ticket buy on the day that its CFS offer is accepted on NCCPL terminal. Thereafter, mark to market losses shall be collected on a daily basis. Both margins will be held till T+3 when first ticket buy is settled by the Financier. After settlement and deposit of CFS financed scrips in blocked CDC account VAR based exposure margin and mark to market losses shall be released to AF.

2.      AF shall not pay any exposure margins on all open CFS second ticket sale contracts, after first ticket buy contracts are settled as CFS Financed Securities are held in blocked CFS/CDC account in his own name. The exception is where BAF has pledged his proprietary CFS financed securities with the Stock Exchange as deposit against Ready or Future deliverable market exposure. In this case, the AF shall pay VAR based exposure margin and mark to market losses, as applicable to Ready market plus Special margins on all open CFS second ticket sale contracts with respect to the pledged CFS securities.

For Broker Financee

1.      Ready Market Purchase WHEN financed on CFS MKII market, margins applicable theron in the ready market shall be released. Ready Market margins shall then be applicable on 2^nd ticket open purchase immediately. Upon release of the second ticket purchase the margins shall remain applicable till settlement date, unless there is a corresponding sale in the ready or CFS market on the same day of release in which case no margins will be held. After T+3 i.e. settlement date, the margins such as VAR exposure margins and special margins shall be payable on second ticket purchase in CFS Market as detailed below.

2.      CFS Financee shall pay VAR based exposure margins as applicable to Ready market plus special margins on all open CFS second ticket purchase contracts after first ticket sale contracts are settled.

Deposit against exposure will be accepted in the shape of eligible shares, approved securities, cash or any other acceptable security such as T Bills, PIBs or bank guarantee

Annexure E 1
 June 28, 2007

VAR BASED MARGINING SYSTEM

Introduction

Value at risk (VAR) is defined as the maximum amount of money that can be lost on a portfolio over a given period of time, with a given level of confidence. VAR provides an accurate statistical estimate of the maximum probable loss on a portfolio when markets are behaving normally.

VAR is typically calculated for one day time period known as the holding period. A 99% confidence level means that there is (on average) a 1% chance of the loss being in excess of that VAR. 

Exposure Margins

Full implementation of a VAR based margining system on real time basis would take some time, as it would require the stock exchanges to install their own computer software and recalculate VAR at the end of each day. The new VAR based margin will then be applicable from the next day.

As an interim measure, it is proposed the following:

�      that VAR based margins are stipulated for each scrip. Margin rates will be revised on  Friday evening based on the methodology defined in this paper (and disclosed to public by Friday evening). New VAR based margins will become applicable from the following trading day.

�      KSE will be responsible for providing VAR based margin rates to the other two stock exchanges on every Friday evening for implementation from the following trading day. These margins should be made available on the exchange�s website for viewing and download.

�      The margins for each scrip would be applied to the outstanding positions of each member in each scrip in compliance with the new netting regime to calculate the margin required to be deposited by each Member with respect to each scrip for all the three markets.

�      The VAR margins shall be collected on execution of the trade. However, pre-trade margin verification requirement shall continue as per existing practice i.e. pre-trade margin of 5% shall be collected on placing the order.

�      Mark to Market losses on all open positions will be collected at the end of each day, after close of trading or prior to the start of trading on the next day.

�      Same VAR based margins shall be applicable to all the three markets.

Calculation of VAR Margin

VaR margin will be based on NCEL Risk Meter calculation using the following three methods:

1. Variance/ Covariance,
2. Historical/Filtered Historical Simulations and
3. Exponentially Weighted Moving Averages (EWMA).

(i)                  The highest VAR margin calculated under the above three methods is taken as the base.

(ii)                This base is then scaled up by a factor of √n to cover an �n� day risk based on the underlying scrip�s liquidity. The scaling up is based on Impact Costs which are used to categorize scrips into three baskets; most liquid, less liquid and illiquid. The VAR base numbers for each scrip are then scaled up by a factor of √1, √3 and √5 respectively. The resulting figure is set as the initial margin to cover the risk for 99% of the days. A minimum three day VAR will be used for the most liquid scrips.

(iii)       The one day VAR based margin is then back tested to arrive at a worst case margin. A Worst Case Margin is added to the VAR to cover 1% of the days (extreme events). The Worst Case Margin is the higher of:

�        5%

�        1.5 times the standard deviation of daily returns of the stock price in the last six months or one year (whichever is higher) and

�        Maximum breach in the security�s VAR back tested over five years (peaks over threshold)

(iv)       Some additional margin will be added as a further cushion for other indetermined risks on account of rounding up while placing a scrip in a particular category. Please note that in category K the VAR based margins is fixed at 60% while in reality it is much higher and in some cases, it is 100%. Category K was created on KSE�s recommendation and insistence that the inherent risks in these scrips are well covered with a 60% margin.

The above computation is done daily by NCEL RiskMeter� by taking the price data on a rolling basis for the past six months or one year (whichever is higher) and the resulting value is examined, recorded and applied weekly/daily.

However, in case there is a sudden increase/ jump in the margin requirement of any particular scrip which moves it from one risk bucket to another, KSE�s management shall immediately implement the new margin on the day the event takes place and inform LSE and ISE.

 In normal circumstances, Friday�s revised values will be applicable from the next trading day.

 The stock exchanges are required to amend their respective trading systems/software to enable application of VaR based margins on a real time basis by June 15, 2007. 

 The VaR based margin is collected on the gross open position of the member. The gross open position for this purpose would mean the gross of all permitted net positions across all the clients of a member including his proprietary position.

For this purpose, there will be no netting of positions across different settlements.

 Using NCEL�s VAR Model, exposure margin will be calculated for each security based on that scrip�s price volatility and the number of days of price risk coverage required and worst case margin. The number of day�s coverage is dependent on the relative liquidity of the security.

 Categorization of Risk Buckets

Rather than publishing the exact calculated margin rate to be used for each security, all companies will be categorized into VaR margin based categories. The following categories with an associated margin rate for each category will be used:

New Listed Companies

For the first 06 months all newly listed companies shall have an exposure margin of 25%. Thereafter it shall be VAR based.

 Annexure E 2
June 28, 2024

VALUATION OF SECURITIES WHICH ARE ELIGIBLE TO BE HELD AS SECURITY

Eligible scrips

�        In order to categorize collateral effectively and as opposed to the current practice which only considers turnover and EPS of the scrip for ranking of eligible securities against deposit, all securities should be categorized on measures of liquidity and volatility. In view of the above, Impact Cost analysis should be conducted. Based on  NCEL ICAnalyzer�, the stocks will be categorized into 3 broad groups:

o       Group 1 will consist of stocks which have been traded on at least 80% of the days in the previous 6 months and whose Impact Cost is less than or equal to 1%.

o       Group 2 shall consist of stocks which have been traded at least 80% of the days in the previous 6 months and whose Impact Cost is greater than 1% and less than 2%.

o       The remaining stocks which don�t fall into group 1 or 2 shall be classified as Group 3.

�        All companies will be accepted for deposit against exposure and losses except:

a)                  Companies on Defaulters Counter of the stock exchange

b)                  Companies whose free float is not in dematerialised form on CDC.

�        The list of companies eligible to be held as security will be reviewed on a quarterly basis and updated lists will be published by KSE, 7 days prior to start of the new quarter.

Valuation of Scrips eligible as collateral

The following haircut shall be applied for valuing the scrips eligible for collateral:

�       

Those companies having negative EPS will be acceptable for deposit against exposure until further notice.

�        For those companies where free float details are not available, KSE�s existing limits for acceptance of securities will be applicable until such time as the free float figures are available.

�        Mark-to-market calculations will be conducted on a daily basis, for scrips held as deposit against exposure and mark-to-market losses, based on the day�s closing prices in the Ready Market. Mark-to-market losses on deposited securities will be recovered on a daily basis.

�        Daily closing price of scrip is defined as the volume weighted average price of the scrip for the last 30 minutes prior to close of trading in the Ready Market. In case of no trading in a particular scrip during the last 30 minutes of the day, volume weighted average price of last traded 30 minutes in that scrip will be taken.

�        A maximum limit per scrip, as a percentage of free float, shall apply to all scrips deposited as security i.e. margin held by the exchanges cannot exceed the stipulated limits of each scrip:

KSE                             -                       50% of free float

LSE                             -                       15% of free float

ISE                              -                       10% of free float

Exchanges will notify the market when 70%, 80% and 90% limits in a scrip are reached.

Annexure �E  3
June 28, 2024

NETTING REGIME FOR EXPOSURE PURPOSES

EFFECTIVE FROM 04.12.2024

A.                 As a general rule the following shall apply:

�      No netting of open positions shall be allowed across the three markets (Ready, Futures Deliverable and CFS). The only exception is in CFS Market and Ready Market where a member may have an open ready market sales position and an open CFS purchase position in the same scrip and in same quantity. In such cases netting shall be allowed between the two market positions, provided that CFS purchase position has been released and settlement of both open positions is on the same date.

�      Exposure margins shall be payable on any open position on the buy side or sell side in the three markets (Ready, Futures and CFS) in accordance with the following netting regime:

B.                 Within Ready Market

�      Netting shall be allowed between buy and sell positions in the same scrip on the same day for the same client.

�      Netting shall be allowed between buy and sell positions in the same scrip on the same day for different clients  from 5.3.2025 it shall not be allowed. Please see the phasing in of netting across clients at �F� below.

�      Netting shall not be allowed between buy and sell positions of different scrips on the same day for the same client  or different clients.

�      Netting shall not be allowed across settlement periods.

�      Deposit against exposure will be accepted either in cash or in the form of approved eligible securities acceptable as deposit against exposure, with the applicable haircuts as detailed in Valuation of Securities � Annexure E 2.

C.        Within Futures Deliverable Market (including Provisionally Listed   Scrips)

�      Netting shall be allowed between buy and sell positions in same scrip for same client in the same contract period.

�      Netting shall not be allowed between buy and sell positions in different scrips for same client during same contract period.

�      Netting shall not be allowed between buy and sell positions in same scrips for different clients during same contract w.e.f May.2007 Futures Contract

�      Netting shall not be allowed across different contract periods i.e. in last one week when two contracts are running simultaneously;

�      Deposit against exposures is required to be paid 50% in cash and rest in approved securities. In case where exposure is due to sale of shares of a particular company, shares of that company up to the extent of net sale can be deposited against 50% cash deposit.

�      The exchanges would pay an appropriate return to the members where cash is deposited against margins.

�      Member�s exposure in deliverable Futures Contract in a scrip shall not exceed 10% of the free-float of such scrip.

In addition to the above, following shall also apply for Futures Contract in Provisionally Listed Securities:

• Member�s exposure in Provisionally Listed scrip, at any point in time during the contract, should not exceed 5% of the free-float for KSE member, 2% of free-float of the scrip for each LSE and ISE member.

�      Trading in provisionally listed scrip will be suspended where the market price increases by more than 100% of the first day�s closing price or Rs. 50 whichever is lower.

D.        Within Existing CFS Market

For Broker Financier   

�      CFS financier shall deposit VAR based exposure margins as applicable to Ready market margin regime (n.b. special margins are not applicable to CFS Financier) on the first ticket buy on the day that its CFS offer is accepted on exchange�s automated trading system. The margins will be held till T+3 when first ticket buy is settled by the financier. After settlement and deposit of CFS financed scrips in blocked CDC account, VAR based exposure margin shall be released to financier.

�      CFS financier shall not pay any exposure margin on all open CFS second ticket sale contracts; after first ticket buy contracts are settled where the CFS financed shares are held in a blocked CFS/CDC account in his own name. The exception is where broker CFS financier has pledged his proprietary CFS financed securities with the stock exchange as deposit against Ready or Future deliverable or Cash settled Future market exposure. In this case the broker CFS financier shall pay Var based exposure margins, as applicable to ready market (N.B. special margin shall not be payable) on all open CFS second ticket sale contracts with respect to the pledged CFS securities.

For Broker Financee

�      CFS Financee shall pay VAR based exposure margins as applicable to Ready market plus special margins on all open CFS second ticket purchase contracts after first ticket sale contracts are settled.

�       Ready Market Purchase when financed on CFS market, margins applicable thereon shall be released. Ready Market margins shall then be applicable on 2^nd ticket open purchase immediately. Upon release of the second ticket purchase the margins shall remain applicable till settlement date, unless there is a corresponding sale in the ready or CFS market on the same day of release in which case no margins will be held

�      CFS Financee may rollover its second ticket purchase contract beyond 22 working days at its discretion. However, the Financier will have the option of releasing its position after 22 working days as per existing practice.

�      CFS facility is available only against ready market net purchases per client on UIN basis inclusive of CFS released positions (2nd ticket purchase contract).

Deposit against exposure will be accepted either in cash or in the form of approved securities acceptable as deposit against exposure in the ready market.

E.         Within Cash Settled Futures Market 90 days Contracts

�      90 days cash settled futures contract of different months shall be considered as separate markets for purpose of calculating the exposure to the Stock Exchange and netting shall not be allowed across markets.

�      Netting shall be allowed between buy and sell positions in same scrip for same client during same contract period.

�      Netting shall not be allowed between buy and sell positions in different scrips for same client during same contract period.

�      Netting shall not be allowed between buy and sell positions in same scrips for different client during same contract period.

�      Netting shall not be allowed in same scrip across contracts i.e. netting not allowed between the three cash settled future contracts running parallel at any given point in time.

�      Deposit against exposure is required to be paid 40% in cash and rest in approved securities.

6. Phasing in of New RMS.

Client Level Netting: Elimination of client level netting with effect from March 5, 2025 in the Ready Market and from the May 2007 Futures Contract in the Deliverable Futures Market. In the Cash-Settled Future Market elimination of client level netting has been done from April 2, 2007.

�        The implementation schedule of the new RMS is in a phased manner whereby 50% of the applicable margins under the new regime are applicable from December 4, 2006. This applies to the Ready and CFS market only. The margins thereafter, increase gradually by 1% every week so that in 50 weeks time, 100% margin collection level is achieved. As of April 30, 2024 the applicable margins under the new RMS are at 71%.

�        Please note VAR based margins against exposure in future deliverable and CSF 90 day contracts are collected 100% w.e.f. December 4, 2024 and April 2, 2024 respectively.

Annexure �E 4
June 28, 2024

 MARK-TO-MARKET LOSS COLLECTION AND PROFIT DISTRIBUTION

 EFFECTIVE FROM 04.12.2024

 General

 �        Mark to market loss in any scrip means, �amount payable by the member on account of his clients, as well as member�s proprietary unsettled net position for a day, to the Clearing House due to difference between volume weighted average price of the unsettled position in each scrip and the �closing price� of that scrip at end of each day.

�        �Closing price� is defined as the volume weighted average price of the last 30 minutes trades of the day. In case of no trading in a particular scrip during the last 30 minutes of the day, volume weighted average price of last traded 30 minutes in that scrip will be taken as the closing price. This will minimize the possibility of price manipulation at the end of the day for margins, mark to market loss collection and for profit distribution purposes.

�        No netting shall be allowed in profits and losses across markets.

�        Losses shall be netted against profits in each market and net losses shall be deposited with the exchanges at the end of each day or prior to opening of trading the next day. Pre-trade verification will be in operation.

�        Mark to market losses shall be determined every day at the close of trading, based on the �closing prices�.

�        Deposit against mark-to-market losses will be accepted only in cash as detailed below:

For ready market                            -                       Cash / Securities

For futures deliverables                   -                       100% in cash

For cash settled                              -                       100% in cash

For CFS                                        -                       Cash / Securities

�        Unrealized profits shall not be paid to members in any form except for the following     (i) in Futures Deliverable Market where profits are paid on weekly basis; and (ii) cash settled futures, profits will be paid on a daily basis.

Ready Market

�        Netting of profits against losses shall not be permitted across clients or between client and proprietary positions for mark to market purposes w.e.f 5.3.2007.

�        Mark to market profit and loss at the client level and proprietary positions on all unsettled positions will only be netted across securities for the same client but not across settlements.

Futures Deliverable Contracts

�                    Netting shall not be permitted across clients or between client and proprietary positions for mark to market purposes w.e.f May 2007 Future Contract.

�                    Mark to market profit and loss will only be netted across securities for the same client or proprietary position in the same contract period.

�                    In case of net loss, members are required to pay 100% of the amount of the loss in cash for each client and proprietary position. Member wise mark-to-market losses will be collected at the end of the day.

�                    Weekly clearing is executed on every Friday at the �closing price� of the day and all the profits and losses in the accounts of the members are settled in cash. However, the distribution of profits arising from fluctuations, in a particular scrip exceeding 20% of the opening rate of the contract is withheld by the Exchange until settlement of the contract.

• Netting shall not be allowed across different contract periods i.e in the last one week when two contracts are running simultaneously, for the same client.

Cash Settled Futures 90 days Contracts

�        Netting shall not be permitted across clients or between client and proprietary positions for mark to market purposes w.e.f  April 2, 2024

�        Netting shall not be allowed across cash-settled Futures Contract and Deliverable Futures Contract.

�        Mark-to-market profit/loss shall be calculated at the end of each trading day at the �Daily Settlement Price�. For the purpose of daily settlement, netting shall be allowed in profits and losses of the same client or proprietary position in different scrips but not in contracts of different periods, i.e., 90 days contracts of different months.

�        In case of mark-to-market loss, members are required to pay 100% of the amount of loss in cash for each client and proprietary position.

Existing CFS Market

CFS Financier

�        CFS Financier shall deposit, on same basis as CFS Financee, mark-to-market losses the day that its CFS offer is accepted on exchange�s automated trading system. The margins will be held till such time that CFS first ticket purchase contract is settled at which point mark to market losses will be released as the CFS securities will be placed in a separate CFS/CDC blocked account. Thereafter mark-to-market losses shall not be collected on CFS second ticket sale contracts as long as the CFS financed securities are held in a blocked CFS/CDC account.

CFS Financee

�        Netting shall not be permitted across clients or between client and proprietary positions for mark to market purposes w.e.f 5.3.2007. Client wise mark to market profit/loss shall be calculated and mark to market loss will be collected at the end of each trading day w.e.f 5.3.2007.

�        Mark to market profit and loss, at the client level and proprietary positions on all unsettled CFS finance positions i.e. second ticket purchase, shall be netted across securities for the same client but not across contract periods. The net loss of the client or proprietary position will be paid by the member to the exchange on the same day or prior to opening of next trading day.

�        Deposit against exposure will be accepted either in cash or in the form of approved securities acceptable as deposit against exposure in the ready market.

 Annexure - E 5
June 28, 2024

Special Margins

�      Special margin shall be payable on a daily basis only where the weighted average  transaction cost of a scrip in the CFS or Futures Deliverable Markets with respect to a client of a  member, is different from 26 weeks moving average price of that scrip in the Ready Market.

�      In case the difference between weighted average transaction cost of a member�s client in a scrip and the 26 weeks moving average price of that scrip in the Ready Market, either side, i.e. upward or downward is up to 10%  from the 26 weeks moving average price, special margin shall not be applicable. However, where such difference is greater than 10% then the following shall apply:    

1.      Where the unidirectional price movement is upwards i.e., in excess of the 26 weeks moving average price of the scrip in the Ready Market, each client of a member who is a net buyer, in terms of number of shares, of that scrip shall be required to pay the special margin i.e., margin equivalent to difference between weighted average transaction cost of the gross buy position of that client  and the 26 weeks moving average price of  that scrip in the Ready Market. This margin shall be calculated and collected daily at the end of day.

�      Please note that mark to market losses shall continue to be collected from the buyer.

2.      Where the unidirectional price movement is downwards i.e., less than the 26 weeks moving average price of the scrip in the Ready Market, each client of a  member who is a net seller, in terms of number of shares,  of that scrip shall be required to pay a special margin i.e., margin equivalent to difference between weighted average transaction cost of the gross sale position of that client and the 26 weeks moving average price of  that scrip in the Ready Market. This margin shall be calculated and collected at the end of day.

�      Please note that mark to market losses shall continue to be collected from the seller.

�      Moreover, please note that special margins are in addition to normal exposure margins collected by the Exchange.

Annexure � E 6
June 28, 2024

POSITION LIMITS ACROSS MARKETS

Annexure � E 7
June 28 , 2007

RISK MANAGEMENT OVERVIEW

APPLICABLE FROM  June, 2007

GENERAL

Risk Management comprises of:

1) Deposit against exposure

2) Deposit against losses

�        Exposure means, �at any point in time, scrip-wise, client wise unsettled amount of net purchases and sales, of a member, under Ready, Futures or CFS Counter�. Netting of purchases and sales has been further elaborated in attached Annexure-E 3.

�        Loss means, �amount payable by the member to the Clearing House due to difference in purchase and sale prices or difference between transaction price and market price in case of outstanding transactions of any one or more scrips at any moment of time during a clearing period�.

�        Generally deposit against exposures and losses are accepted either in cash or in the form of approved securities.

RISK MANAGEMENT FOR READY MARKET

�        Deposit against exposures in the ready market is payable as per the prescribed VAR based margin regime given in the paper on �VAR based margining System� attached as Annexure E 1.

�        In case of losses during any particular clearing period, members are required to pay 100% of the amount of losses (subject to basic exemption of Rs. 2 million per member) within the time specified by the Board in the notice but shall in all cases be collected prior to market opening the next trading day.

�        The system will continue to check the adequacy of available deposit at order level through Pre-Trade Margin Verification mechanism. On placing of order, 5% margin is collected.

�        The existing limit of 500,000 shares per order in the cash market shall continue.

RISK MANAGEMENT FOR FUTURES DELIVERABLES MARKET

�        A basic deposit of Rs.500,000 is required from each member for trading in the Futures Deliverables Market.

�        Deposit against exposures in the future deliverable market is payable as per the prescribed VAR based margins given in the paper on �VAR based margining System� attached as Annexure E 1.

�        Deposits against exposures are required to be paid 50% in cash and rest in approved securities. Approved securities means securities eligible for Futures trading only in the case of future deliverable market. In case where exposure is due to sale of shares of a particular company, shares of that company up to the extent of net sale can be deposited against 50% cash deposit.

�        Member may submit Bank Guarantee on prescribed format in lieu of 50% securities margin requirement. KSE management to determine the required format of the guarantee and to nominate the acceptable banks

�        The system will continue to check the adequacy of available deposit against exposure at order level through Pre-Trade Margin Verification mechanism. On placing of order, 5% margin is collected.

�        In case of losses, members are required to pay 100% of the amount of losses in cash with basic exemption of Rs. 100,000/-.per member. Mark-to-market losses are collected at the end of the day before opening of trade on the next trading day. However, mark-to-market losses of members having exposures of more than Rs. 200 million are collected twice a day.

�        Weekly clearing is executed on every Friday at the closing rate (defined in Annexure E 4) of the day and all the profits and losses in the accounts of the members are settled in cash. However, the distribution of profits arising from fluctuations, in a particular scrip exceeding 20% of the opening rate of the contract is withheld by the Exchange until the settlement of the contract.

RISK MANAGEMENT FOR PROVISIONALLY LISTED SECURITIES

In addition to the provisions mentioned in future deliverable contracts, following shall apply for Futures Contract in Provisionally Listed Securities:

�         Deposit against exposures is payable as per the prescribed VAR based margin regime given in the paper on �VAR based margining System� attached as Annexure E 1.

�        Any member of the Exchange can enter into future trading in Provisionally Listed Companies under the said Regulations if he notifies to the Exchange in writing of such desire and send a cheque of Rs.100, 000/- as basic deposit for each scrip to be traded.

�        Payments upto Rs.2,500,000/- for the purpose of clearing or deposit shall be accepted by cheque. Members will have to submit pay orders for amount exceeding Rs.2,500,000/-.

�        Weekly clearing is executed on every Friday at the closing rate (defined in Annexure E 4) of the day and all the profits and losses in the accounts of the members shall be settled in cash. However, the distribution of profits arising from fluctuations in a particular scrip shall be withheld by the Exchange until the settlement of the contracts.

�        Member�s exposure in Provisionally Listed scrip, at any point in time during the contract, should not exceed 3% of shares offered to public for listing.

Trading in a scrip is not allowed beyond the price fluctuation of 100% or Rs. 50, whichever is lower, from the first day of closing rate till such time the company is formally listed.

 Annexure F

 Bank Guarantee

     Under development by NCCPL and would be provided later.

Annexure G

Default Regulations Governing CFS MKII

 
      Under development by NCCPL and would be provided later.

Annexure X

 Default Management � CFS-MK II

Default means that a Broker CFS Financee or BAF or a Non Broker AF does not deposit a margin call within the stipulated time; or does not make the required payment or deliver shares to NCCPL by the stipulated time on settlement day.

NCCPL will draft the Default Regulations which shall cater to defaults in all the markets. The general default management procedures of NCCPL are specified in Section B below. However, any special treatments that may be required in handling defaults in CFS Mk II Market are discussed in Section A.

In order to understand the default management procedures peculiar to the CFS Mk II Market, the following possible scenarios need to be considered:

In general, whenever AF fails to settle it obligations on the Settlement Day, after issuing suspension notice by the NCCPL, the securities held in the CDC CFS Blocked Account of such suspended AF shall with immediate effect stand transferred in the name of NCCPL. (However, Legal advice in this regard is required as there is a probability that, the court may issue a stay order in respect of such shares if the defaulter AF files a suit against NCCPL. In this situation, the stay order will prevent NCCPL from transferring such shares, when the CFS 2^nd ticket contract is released.)  

1.      NBAF or BAF defaults on settlement of First ticket buy

In such circumstances NCCPL shall arrange funding to settle all the unsettled First Ticket Buy Tickets of the Defaulting AF. The financee will be allowed to continue the position for a maximum of 22 working days, after which the contract shall be released by NCCPL. In any case, the maximum loss to NCCPL for the default shall be the excess of interest cost on funding obtained by NCCPL over the premium income on the CFS contracts. The estimated amount of this maximum loss shall be taken into account when calculating the final loss demand to be given to the Defaulting Financier. Apart from this, the normal default procedures (Section B) shall apply.

2.      Financee Member defaults on settlement of first ticket sell

This scenario is not possible since the Financier will settle the money obligation on behalf of the financee,

3.      Financee member defaults on second ticket purchase

Normal default management procedures (Section B) shall apply and no special treatment is necessary.

4.      BAF fails to deliver on second ticket sell as shares pledged in other markets

Where the BAF, fails to deliver pledged shares (already pledged in favor of exchange(s) against its ready or futures market exposure) on the settlement date to the NCCPL for fulfillment of delivery obligation, the exchange(s) shall deliver such shares to NCCPL. However, NCCPL shall make necessary payment to the respective stock exchange to cover the shortfall in collateral of ready or futures market. This payment shall be made by NCCPL using funds released by the CFS financee. Therefore, no loss shall arise in the CFS Mk II Market.

5.      NBAF fails to deliver on second ticket sell

This scenario is not possible as all shares financed by NBAF shall be held in a blocked account for onward delivery when CFS contract is released by the financees.

1.      Issuance of Initial Notice and suspension notice

a)      NBAF or BAF / Financee shall be considered to have �failed to settle his money obligations� upon receipt of confirmation by the Company by the Designated Time from the Designated Branch of his Settling Bank as to non or short collection as compared to the details set out in the Settlement Statements provided by the Company.

b)      The Company shall issue a 30-minutes notice to such NBAF or BAF / Financee and to all Stock Exchanges containing the details of the unpaid amount.

c)      Where a NBAF or BAF / Financee fails to pay the amount as specified in the aforementioned notice, the Company may in accordance with its Regulations, suspend or restrict access of such NBAF or BAF / Financee (hereinafter referred to as the �Suspended NBAF or BAF / Financee�) to any or all of the services provided by the Company.

d)      Immediately after issuing suspension notice, the securities held in the CDC Blocked Account of suspended AF shall stand transferred in the name of NCCPL.

2.      Cash Management

a)      The NCCPL shall arrange financing against the retrieved securities

b)      Funds to be obtained from the CFS Protection Fund

c)      Funds to be obtained by realizing or encashing the Collateral Security furnished by such Suspended NBAF or BAF / Financee to the Company and if required funds shall also be obtained from the respective Stock Exchange to cover shortfall.

d)      After applying aforementioned resources, if any shortfall still remained, the Company shall hold proportionately the amounts in accordance with credit due to all those Clearing Members to whom credit shall be due on that Settlement Date.

3.      Squaring-out process

a)      In order to proceed further the NCCPL shall refer the case to the Default Management Committee which comprises of the MD and Chairman of the relevant Exchange and NCCPL and nominee from Banking Association and MUFAP

b)      In consultation with the afore-mentioned Committee, the NCCPL shall net-off all unsettled positions of all the market in each security and determine the security-wise net positions for squaring-up/closed-out.

c)      The NCCPL shall square-up the securities in the ready market of the relevant exchange. The securities of the defaulting financier deposited as margins and MTM losses shall also be realized through this process.

d)      Where, the NCCPL is unable to square-up such securities in the regular market of the relevant exchange, the NCCPL shall square-up such securities through a system whereby all Clearing Members (including Non-Brokers) can make a bid for such securities directly.

4.      Issuance of final notice

a)      Where the shortfall still remains after the completion of squaring-up procedure the NCCPL shall after determining the final loss serve a Final Loss Notice to such suspended AF/ Financee.

b)      Where the suspended AF fails to comply with the said notice, the NCCPL shall declare it to be a Defaulting AF / Financee.                                                                                                           

c)      Consequently, the relevant exchange(s), shall also declare such AF (in case of a BAF) or Financee to be a defaulter in all markets namely Ready and Futures markets.

5.      Realisation of common assets and allocation of final loss

a)      After the declaration of default, the assets of such defaulting AF (in case of a BAF) or Financee under the control of relevant stock exchange such as Membership Card and Room etc shall be liquidated and the proceeds shall be proportionately allocated to all the markets.

b)      The NCCPL shall allocate the final loss as per the following:

�         Scrip-wise profits in any market can be applied on a pro rata basis against scrip-wise losses in other scrips in the same market on the same exchange

�         Profits in any market can be applied on a pro rata basis against losses in other markets of the same exchange

�         Profits in any exchange can be applied on a pro rata basis against losses appearing in other exchanges.

�         The losses will be allocated on a pro rata basis to all AFs who have open position in that particular scrip.