Trading window
Also written Notional trading window · Trading window closure · Trading restriction period
A notional window used to monitor trading by designated persons — closed by the compliance officer whenever they can reasonably be expected to possess unpublished price sensitive information.
In plain language
The trading window is not a real place and nothing opens or shuts in a trading system. It is a monitoring device: a period during which designated persons and their immediate relatives are permitted to deal in the securities concerned, and outside which they are not.
The logic is preventive rather than punitive. Rather than waiting to prove that a particular employee traded while holding particular information, the code shuts the door during the periods when people in those roles can reasonably be expected to hold it — most obviously the run-up to results.
Closing the window is the compliance officer's call, and it is imposed in relation to the securities to which the information relates, not across the whole market.
How it works
Schedule B, which sets the minimum standards for a listed company, fixes the mechanics.
Closure. The window shuts when the compliance officer determines that a designated person, or a class of them, can reasonably be expected to be in possession of UPSI. On top of that discretionary closure there is an automatic one: the trading restriction period applies from the end of every quarter until 48 hours after the declaration of financial results. The gap between the audit committee clearing the accounts and the board meeting should be as narrow as possible, preferably the same day, to avoid leakage.
Re-opening. The compliance officer decides the timing, taking account of the information becoming generally available and capable of being assimilated by the market — but in no event earlier than forty-eight hours after it becomes generally available.
While open. Trading by designated persons is subject to pre-clearance by the compliance officer where the value exceeds the threshold the board stipulates. Before approving, the compliance officer is entitled to seek a declaration that the applicant holds no UPSI, and must consider whether that declaration is capable of being rendered inaccurate. A pre-cleared trade must be executed within a timeframe that in no event exceeds seven trading days, failing which fresh pre-clearance is needed.
Carve-outs. The window restriction does not apply to certain transactions specified in the proviso to Regulation 4(1), nor to a pledge of shares for a bona fide purpose such as raising funds — both subject to pre-clearance — nor to acquisitions by conversion of warrants or debentures, subscription to a rights issue, further public issue or preferential allotment, or tendering shares into a buy-back, open offer or delisting offer.
A worked example
Deccan Chemicals Ltd closes its September quarter on 30 September.
- 30 September — the trading restriction period begins automatically.
- 7 November, 4:30 pm — the audit committee clears the accounts and the board approves them the same day; results reach the exchanges at 6:10 pm.
- 9 November, 6:10 pm — forty-eight hours elapse, and the compliance officer may re-open the window.
Mr Rao, a designated person, wants to sell 12,000 shares at about Rs 1,450 — roughly Rs 1.74 crore. Deccan's board has set a pre-clearance threshold of Rs 25 lakh, so the trade needs clearance. He applies on 10 November with a declaration that he holds no UPSI, is cleared the same day, and must execute within seven trading days — by 19 November — or apply again.
Had he sold on 20 October instead, the window would have been shut. The sale breaches the code whether or not he actually knew the numbers, because the restriction is on trading in the closed period, not on trading with knowledge. Deccan's code must then stipulate sanctions, and the company must promptly inform the stock exchanges where its shares are traded.
Why NISM asks about it
Chapter 7, section 7.2 and Schedule B. The examinable numbers are the 48 hours after results, the 48-hour minimum before re-opening, and the seven trading days to execute a pre-cleared trade. A favourite question gives a results date and asks the earliest date a designated person may trade. Another asks which transactions escape the window, where the pledge-for-bona-fide-purpose and rights-issue answers are correct and "any purchase below Rs 10 lakh" is not.
Common exam traps
- Closure attaches to the securities to which the UPSI relates, not to everything the designated person owns.
- The quarter-end restriction runs to 48 hours after declaration of results, not to the declaration itself and not to the next trading day.
- Re-opening is not earlier than 48 hours after the information becomes generally available — the compliance officer may wait longer, never less.
- Trading window norms do not apply to trades under an approved trading plan, and such trades need no pre-clearance either. That is the single most commonly missed carve-out.
- The pre-clearance threshold is set by the board, not by the regulations — there is no statutory rupee figure to memorise.
- The Schedule C minimum standards for intermediaries and fiduciaries do not carry the notional trading window at all. There the controls are pre-clearance above the board's threshold and the compliance officer's confidential restricted list.
Check yourself
1."When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate." True or False?
- a)True
- b)False
Show the answer
Answer: (a) True
The statement reproduces clause 6 of Schedule B exactly.
When the trading window is open, trading by designated persons shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above such thresholds as the board of directors may stipulate.
Two gates, not one. When the window is closed, designated persons and their immediate relatives shall not trade in securities at all. When it is open, larger trades still need clearance.
What the officer does before approving: he shall be entitled to seek declarations to the effect that the applicant for pre-clearance is not in possession of any unpublished price sensitive information. He shall also have regard to whether any such declaration is reasonably capable of being rendered inaccurate.
A declaration is not taken at face value — the officer must consider whether it could be untrue.
And a clearance does not last indefinitely: the code shall specify any reasonable timeframe, which in any event shall not be more than seven trading days, within which trades that have been pre-cleared have to be executed by the designated person, failing which fresh pre-clearance would be needed.
Seven trading days.
Schedule C imposes the same requirement on intermediaries and fiduciaries, above thresholds set by the board of directors or head(s) of the organisation, with the compliance officer additionally maintaining a list of such securities as a "restricted list" which shall be used as the basis for approving or rejecting applications for pre-clearance.
One exemption from pre-clearance: pre-clearance of trades shall not be required for a trade executed as per an approved trading plan, for which trading window norms shall not be applicable either.
And after the trade, one more restriction — a contra trade may not be executed for not less than six months.
2.A trading plan must not entail commencement of trading earlier than what period from the public disclosure of the plan?
- a)One hundred and twenty calendar days
- b)Sixty calendar days
- c)Thirty trading days
- d)Six months
Show the answer
Answer: (a) One hundred and twenty calendar days
Such Trading Plan shall... not entail commencement of trading on behalf of the insider earlier than one hundred and twenty calendar days from the public disclosure of the plan.
Calendar days, not trading days, and running from public disclosure, not from submission or approval.
Why so long. The gap is designed to outlast any UPSI the insider held when he framed the plan — which is reinforced by a further condition: the implementation of the Trading Plan shall not be commenced if any unpublished price sensitive information in possession of the insider at the time of formulation of the plan has not become generally available at the time of the commencement of implementation.
The other requirements: the plan must not entail overlap of any period for which another trading plan is already in existence, must specify for each trade either the value of trade to be effected or the number of securities to be traded, the nature of the trade, either specific date or time period not exceeding five consecutive trading days, and a price limit within twenty per cent of the prior closing price — and must not entail trading in securities for market abuse.
What approval gives the insider: pre-clearance of trades shall not be required for a trade executed as per an approved trading plan, and trading window norms shall not be applicable.
What it costs him: the plan shall be irrevocable and the insider shall mandatorily have to implement the plan, without being entitled to either execute any trade in the securities outside the scope of the trading plan or to deviate from it except due to permanent incapacity or bankruptcy or operation of law.
And on price: if price of the security is outside the price limit set by the insider, the trade shall not be executed.
**The compliance officer must approve or reject the trading plan within two trading days and notify the exchanges on the day of approval.
3.The trading restriction period around financial results runs:
- a)From the end of every quarter till 48 hours after the declaration of financial results
- b)From the board meeting till the announcement
- c)For seven trading days before the results
- d)For one month after the results
Show the answer
Answer: (a) From the end of every quarter till 48 hours after the declaration of financial results
Trading restriction period shall be made applicable from the end of every quarter till 48 hours after the declaration of financial results.
A fixed, automatic closure — unlike the discretionary closure, which happens when the compliance officer determines that a designated person or class of designated persons can reasonably be expected to have possession of UPSI.
Why from the quarter-end. The moment a quarter closes, the numbers exist inside the company even if no one has yet compiled them — so possession of UPSI begins then, not at the board meeting.
And a related instruction: the gap between clearance of accounts by the audit committee and board meeting should be as narrow as possible and preferably on the same day to avoid leakage of material information.
Every extra day between those two events is a day when the results are known but unannounced.
The forty-eight hours at the end matches the re-opening rule generally: the timing of re-opening is decided by the compliance officer taking into account various factors including the unpublished price sensitive information in question becoming generally available and being capable of assimilation by the market, which in any event shall not be earlier than forty-eight hours after the information becomes generally available.
Publication is not enough — the market must have time to absorb it.
**While the window is closed, designated persons and their immediate relatives shall not trade in securities.
Certain transactions are exempt, including the exonerating transactions under regulation 4 and a pledge of shares for a bonafide purpose such as raising of funds, subject to pre-clearance by the compliance officer, and corporate actions such as subscribing to rights issue, further public issue, preferential allotment or tendering of shares in a buy-back offer, open offer, delisting offer.
And an approved trading plan escapes the window entirely — trading window norms shall not be applicable.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Connected personA person whose association with a company in the six months before the act put them, or could reasonably be expected to put them, in a position to access unpublished price sensitive information.
- Unpublished price sensitive informationInformation about a company or its securities that is not generally available and that would, on becoming available, be likely to materially affect the price of the security.
- Contra trade restrictionThe cooling period of not less than six months — two months for mutual fund units — during which a designated person who has been permitted to trade may not take the opposite side of that trade.
- Designated personsThe people a listed company, intermediary or fiduciary formally names as subject to its insider trading code of conduct, chosen by the access their role gives to price sensitive information.
- Trading planA plan an insider may formulate under Regulation 5, starting no earlier than 120 calendar days after public disclosure, avoiding the results blackout, running at least twelve months, specifying quantity, nature, a…
- Restricted listThe confidential list of securities an intermediary's compliance officer maintains, used as the basis for approving or rejecting applications for pre-clearance of trades by designated persons.
- Generally available informationInformation accessible to the public on a non-discriminatory basis — the opposite pole of unpublished price sensitive information, and expressly not including unverified media reports.
- Trading plans — regulation 5A pre-announced, irrevocable schedule of trades an insider files with the compliance officer, which may not begin for 120 calendar days and then executes without pre-clearance or trading window limits.