Other Services Provided by Brokers — from IPOs to margin trading

Where this chapter sits

Chapter 8 carries 10% of the paper and closes the Securities Operations and Risk Management syllabus. It is a survey chapter — seven distinct services, each with its own registration requirement and its own numbers.

The exam: 120 minutes, 100 marks, 50% to pass, 25% negative marking. The net worth figures in this chapter are close together and easy to swap — ₹3 crore, ₹5 crore, ₹50 lakh — and each belongs to a different service. Fix them precisely or leave the question.

The rule that governs the whole chapter: for all the other services, the brokers need to be separately registered with SEBI. Licenses and certifications have to be obtained for each of the services offered by the stockbrokers.

Typically, big stock brokers have converted themselves into financial services companies, providing investment options in equities, derivatives, commodities, IPO, mutual funds, depository services, portfolio management services and insurance, plus wealth management services for high net worth individuals.

A stock broker's outlet normally offers:

• Investment advice, research reports and market review.
• Depository services.
• Direct Market Access.
• Mobile trading and Smart Order Routing.
• Algorithmic trading.
• IPOs and mutual funds distribution.
• Internet-based online trading.
• Margin funding.

IPO applications

An IPO is the process by which a company goes public, i.e. offers its shares to the public for sale for the first time.

The broker's role: the IPO process is facilitated by brokers as their system is connected with the stock Exchange's main IPO system and online uploading of forms is carried out. Thus, at any given time, the online status is available on the stock Exchanges.

Who may participate: the Book Running Lead Manager will give a list of trading members who are appointed as syndicate/sub-syndicate members to participate in the book building process to the Exchange. To enable the IPO platform, a member has to comply with the registration procedure specified by Exchanges.

How offers are handled: as and when valid offers are received by the system of the stock Exchange, they are first numbered, time stamped, and stored in the book. Each offer has a distinctive offer number and a unique time stamp on it. All the offers placed in the system will remain outstanding till the last day of the book building process, and trading members can modify or cancel all the offers placed in the system from the start till the last day of the book-building process within the SEBI guideline.

ASBA

SEBI has introduced a facility called Application Supported by Blocked Amount (ASBA) in the primary market for investors.

In ASBA the application money remains blocked in the investor's account till finalization of the basis of allotment in the issue. The application money to the extent of allotment value is debited from the bank account only if the investor's application is selected for allotment after the basis of allotment is finalized, and the non-allotted amount is unblocked.

It is mandatory: all the investors shall mandatorily use only ASBA facility for all issues opening from 01 January 2016 onwards.

And the block must come first: the ASBA applications in public issues shall be processed only after the application monies are blocked in the investor's bank accounts.

The UPI mechanism

To further streamline the process of IPO, SEBI decided on the use of Unified Payment Interface (UPI) as a payment mechanism with ASBA for application in public issues by retail investors through intermediaries.

All Individual Investors applying in public issues where the application amount is up to ₹5 lakh shall use UPI and shall also provide their UPI ID in the bid-cum-application form submitted with any of:

• A syndicate member.
• A stock broker registered with a recognised stock exchange (and whose name is mentioned on the website of the stock exchange as eligible for this activity).
• A depository participant (whose name is mentioned on the website of the stock exchange as eligible).
• A registrar to an issue and share transfer agent (whose name is mentioned on the website of the stock exchange as eligible).

What it achieves: the process increases efficiency, eliminates the need for manual intervention at various stages, and thereby reduces the time duration from issue closure to listing by up to 3 working days.

And the listing deadline: the T+3 timeline for listing after the closure of the public issue will be applicable for all public issues opening on or after December 1, 2023.

Extended to debt: SEBI has decided that all individual investors applying in public issues of debt securities, non-convertible redeemable preference shares, municipal debt securities and securitised debt instruments through intermediaries, where the application amount is up to ₹5 lakh, shall only use UPI for the purpose of blocking of funds.

But with an alternative preserved: investors may continue to submit the bid-cum-application form online using the facility of linked online trading, demat and bank account (3-in-1 type accounts) for those debt-side issues.

Trading of mutual fund units

The Exchanges provide a platform — for example the Mutual Fund Service System of NSE and BSE Star MF — to trading members and mutual fund distributors for trading in open ended mutual fund schemes.

Who may participate: the trading members who are AMFI Registration Number (ARN) holders and have passed the NISM certification examination are permitted to participate in the trading of mutual fund units through the exchange trading platform. Further, eligible members would have to register as distributor with the mutual fund company, so eligible members would be able to place orders only in respect of Mutual Fund Companies where they have registered as distributor.

Apart from brokers, mutual fund distributors registered with AMFI who are permitted by the stock exchanges can also participate.

A conflict-of-interest requirement to remember: under Regulation 4(g) of the SEBI (Investment Advisers) Regulations, 2013, stock brokers are required to comply with general obligations and responsibilities specified in Chapter III, which inter alia provide that client level segregation of advisory and distribution activities needs to be ensured at the entity and group level.

On the AMC side: AMCs desirous of providing this alternate mechanism through the Exchange platform shall enter into an agreement with the Exchange/Clearing Corporation, and shall notify schemes which they wish to permit on the Mutual Fund platform.

On client registration: the stock broker shall not be allowed to place an order for the client if registration details of the client are not maintained. A client is registered as an individual client, though depository accounts can be maintained in joint accounts. A bulk upload facility is also available.

Order handling: the broker can declare upfront whether the subscription/redemption request would be settled in physical mode or depository mode. For additional subscription in physical mode the folio number would be mandatory. If the settlement is in depository mode, it is mandatory for the stock broker to enter depository details — depository ID and client beneficiary ID available in DP master.

Additional exchange facilities:

• Submitting bulk orders using an offline order entry facility.
• Taking online backups of orders entered for the day.
• Printing confirmation slips either online or offline.

The discontinuation of pool accounts

This is the most examinable part of the section.

SEBI has advised members that pooling of funds and/or units by stock brokers/clearing members in any form or manner shall be discontinued for mutual fund transactions.

Funds pay-in is directly received by the clearing corporation from the investor account and funds pay-out is directly made to the investor account. Pay-in/pay-out of funds shall not be handled by the stock brokers/clearing members.

How funds move: funds can be transferred to the clearing corporation account in different manners such as net banking, NEFT, RTGS, UPI. Physical/e-mandates can be registered in favour of the Clearing Corporation. Funds shall be debited from the client account on the settlement day.

Timing and matching: processing of orders is subject to the successful debit of funds and receipt of MIS from payment aggregators. Funds should be received by the clearing corporation within 5 working days of orders being placed. The CC permits a single payment for multiple orders, provided the total payment amount equals or exceeds the sum of all orders. If the payment amount exceeds the total order value, the excess amount will be refunded.

On units: for both demat and non-demat mode transactions, the units shall be credited and debited directly to/from the investors' demat account/folio account without routing it through the pool account of the stock brokers/clearing members. However, for redemption of units held in dematerialised mode, the practice of issuance of Delivery Instruction Slip (physical or electronic) to the Depository Participant to debit the units for delivery to clearing corporation may continue.

Refunds: Clearing Corporation shall initiate refund for funds received but which could not be settled with the AMC within a time period specified by the CC.

Settlement basis: all requests for subscription and redemption are settled on an individual basis and only to the extent of the funds/units received from the registered accounts of clients. Clear funds should be available by the cut off time in the designated account of the CCs for processing the order on the same day.

Pay-out timelines:

For non-demat transactions: the units shall be credited to and debited directly from the folio account by RTA, and the funds pay-out shall be credited directly by the AMC/RTA to the client bank account registered with the RTA.

Portfolio Management Services

Many stock brokers also offer Portfolio Management Services to their clients. For this, a separate PMS license has to be obtained from SEBI. This is normally offered to High Net worth Individuals.

Under the SEBI (Portfolio Managers) Regulations, 2020, a "portfolio manager" means a body corporate which, pursuant to a contract with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or goods or funds of the client.

Three types:

Registration conditions

• The applicant is a body corporate.
• Has the necessary infrastructure like adequate office space, equipment and manpower.
• Has appointed a compliance officer.
• Net worth of not less than five crore rupees. Portfolio managers registered before the 2020 Regulations commenced shall increase their net worth to not less than ₹5 crores within 36 months from January 16, 2020.
• Is a fit and proper person as per the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.

SEBI also considers whether any disciplinary action has been taken against a person connected with the applicant, whether the applicant or its officers are involved in any litigation connected with the securities market that has an adverse bearing on the business, and whether any of them has at any time been convicted for any offence involving moral turpitude or has been found guilty of any economic offence.

The principal officer — an employee designated as such, responsible for the decisions made by the portfolio manager for the management or administration of the portfolio, and all other operations — must have:

• A professional qualification in finance, law, accountancy or business management from a recognised university, or a Post Graduate Program in the Securities Market (Portfolio Management) from NISM of a duration not less than one year, or a CFA charter from the CFA institute.
• Experience of at least five years in related activities in the securities market, including in a portfolio manager, stock broker, investment advisor, research analyst or as a fund manager — of which at least 2 years of relevant experience is in portfolio management or investment advisory services or in the areas related to fund management.
• The relevant NISM certification, with a fresh NISM certification obtained before expiry of the validity of the existing certification.

In addition to the Principal Officer and Compliance Officer, there must be at least one person with graduation from a recognised university and an experience of at least two years in related activities in the securities market.

The fees:

Obligations of a portfolio manager

The agreement and disclosure. The portfolio manager, before taking up an assignment, enters into an agreement in writing with the client clearly defining the inter se relationship and setting out their mutual rights, liabilities and obligations, per Schedule IV. The portfolio manager shall provide to the client the Disclosure Document as specified by SEBI, prior to entering into an agreement. The Disclosure Document has been divided into two sections viz. static and dynamic.

The Code of Conduct is in Schedule III of the SEBI (Portfolio Managers) Regulations, 2020.

The general obligations:

• The discretionary portfolio manager shall individually and independently manage the funds of each client in accordance with the needs of the client, in a manner which does not partake the character of a Mutual Fund.
• The portfolio manager shall not accept from the clients funds or securities worth less than ₹50 lakh. The first single lump-sum investment amount received should not be less than ₹50 lakh. The requirement shall not apply to an accredited investor, nor to the Co-investment Portfolio Manager.
• Shall act in a fiduciary capacity with regard to the client's funds and shall segregate each client's holding in securities in separate accounts.
• Shall keep the funds of all clients in a separate account maintained in a Scheduled Commercial Bank.
• Shall not derive any direct or indirect benefit out of the client's funds or securities.
• Shall not borrow funds or securities on behalf of the client.
• Shall not lend securities held on behalf of the clients to a third person except as provided under regulation.
• Shall ensure proper and timely handling of complaints from his clients.
• Shall ensure that any person or entity involved in the distribution of its services is carrying out the distribution activities in compliance with the regulations.

Investment restrictions:

• The money or securities accepted shall not be invested or managed except in terms of the agreement.
• The discretionary portfolio manager shall invest funds in securities listed or traded on a recognized stock exchange, money market instruments, units of Mutual Funds and other securities as specified by the Board.
• The portfolio manager offering non-discretionary or advisory services may invest or provide advice for investment up to 25% of the assets under management of such clients in unlisted securities, in addition to the securities permitted for discretionary management.
• Up to one hundred percent of the assets under management of large value accredited investors may go into unlisted securities, subject to disclosure and agreement.
• The Co-investment Portfolio Manager shall invest hundred percent of the assets under management in unlisted securities of investee companies where the Category I and Category II AIFs managed by it make investment.
• Portfolio Managers may invest in units of Mutual Funds only through direct plan.
• Shall not leverage the portfolio of its clients for investment in derivatives.
• Shall not deploy the clients' funds in bill discounting, badla financing or for the purpose of lending or placement with corporate or non-corporate bodies.
• Shall not invest a client's fund based on the advice of any other entity.
• Shall not indulge in speculative transactions — shall not enter into any transaction for purchase or sale of any security which is periodically or ultimately settled otherwise than by actual delivery or transfer of security, except transactions in derivatives.

Records and reporting:

• Shall maintain separate client-wise accounts, with funds received, investments or disinvestments, all the credits like interest, dividend, bonus or any other beneficial interest, and debits for expenses properly accounted for.
• Shall furnish periodically a report to the client, as agreed in the contract, but not exceeding a period of three months, and as and when required by the client.
• The books of account will be audited yearly by a qualified auditor.
• Every portfolio manager has to appoint a custodian in respect of securities managed or administered by it — however, if the portfolio manager provides only advisory services, then the provision does not apply.
• All the books of account and other records and documents shall be maintained for a period of 5 years.

Distributor oversight: any person or entity involved in the distribution of portfolio management services shall obtain registration with the Association of Portfolio Managers in India (APMI), and Portfolio Managers shall ensure that any person or entity engaged in the distribution of its services has obtained registration with APMI.

Research reports and advisory services

Under the SEBI (Research Analysts) Regulations, 2014, a research entity is a registered intermediary — like a stock broker or merchant banker — that issues research reports or opinions on securities to influence investment decisions.

And there is no free pass for bundled research: providing research as a "value-added service", even without a separate fee, requires mandatory SEBI registration. All associated persons must hold a valid NISM certification as specified by SEBI.

On investment advice: as per the SEBI Investment Adviser Regulations 2013, any stock broker registered under the SEBI (Stock Brokers) Regulations 2026 who provides any investment advice to its clients incidental to their primary activity shall not be required to seek registration under these regulations, provided that stock brokers shall comply with the general obligations and responsibilities as specified therein.

Verification of claims: Regulations 16D and 16E of the SEBI (Intermediaries) Regulations, 2008 provide for the verification of risk and return metrics by a Past Risk and Return Verification Agency (PaRRVA). Claims may be made by IAs, RAs, Algo providers on-boarded by Stock Brokers and empanelled with a recognized Stock Exchange, and intermediaries permitted to provide the services of IA, RA and Algorithmic Trading, in terms of risk and return metrics verified by PaRRVA.

Depository services

To provide these services, the broker or trading member has to get registered as a depository participant of a depository as per the SEBI Act 1992 and the Depositories Act of 1996.

The relationship between the DPs and the depositories is governed by an agreement made between the two under the Depositories Act. The form of the agreement is specified in the bye-laws of the depository.

Under the Depositories Act, 1996, a DP is described as an agent of the depository. Through the DP, Depositories interface with the investor and provide depository services. The SEBI (Depository & Participants) Regulations, 2018 and the bye-laws of depositories prescribe the eligibility criteria to become a DP.

Every DP shall abide by the Code of Conduct as specified in Part A of the Third Schedule of the SEBI (Depository Participant) Regulation, 2018. The Depository Participant can act as participant for both depositories subject to fulfilment of certain conditions. Every depository participant shall enter into an agreement with a beneficial owner/client before acting as a participant on his behalf.

The main activity of the DP is to open a demat account for an investor, and the main activity being the settlement and transfer of securities from one beneficiary account to another pursuant to a trading activity of an investor.

A key control: a participant shall register the transfer of securities to or from a beneficial owner's account only on receipt of instructions from the beneficial owner, and thereafter confirm the same to the beneficial owner.

Other DP services:

• Opening a demat account.
• Dematerialisation — the process of converting securities held in physical form into holdings in book entry form.
• Maintaining record of securities held by the beneficial owners in electronic form.
• Settlement of trades by delivery or receipt of securities from/in BO accounts.
• Receiving electronic credit in respect of securities allotted by issuers under IPO or otherwise.
• Receiving non-cash corporate benefits such as allotment of bonus and rights shares.
• Pledging of dematerialized securities and facilitating loans against shares.
• Freezing of the demat account for debits, credits, or both.

Margin trading

Margin trading in the Indian equity market is a facility that allows an investor to buy more shares than they can afford with their available funds by borrowing money from their stockbroker. Brokers charge interest on such funding. This concept, also known as leverage, amplifies both potential profits and losses.

Eligibility

Only corporate brokers with net worth of at least ₹3 crore are eligible for providing margin trading facility to their clients.

The stock brokers wishing to extend margin trading facility shall be required to obtain prior permission from the exchange where the facility is proposed to be offered, and the exchange shall have the right to withdraw this permission at a later date, after giving reasons.

Eligible securities and initial margin

The facility of margin trading is available for those securities which are classified as Group 1 securities, and Equity Exchange Traded Funds.

The applicable VaR and ELM shall be as in the cash segment for a particular stock and units of equity ETF.

The initial margin payable by the client to the Stock Broker shall be in the form of cash, cash equivalent or Group I equity shares and units of equity ETF, with appropriate haircut.

Stock brokers shall ensure maintenance of the aforesaid margin at all times during the period that the margin trading facility is being availed by the client. In case of shortfall, the stock broker shall make necessary margin calls.

Collateral and funded stocks

• The stocks or units of Equity ETFs deposited as collateral ("Collaterals") and those purchased under the margin trading facility ("Funded stocks") shall be identifiable separately and no comingling shall be permitted for the purpose of computing funding amount.
• Collateral and Funded stocks shall be marked to market on a daily basis.
• In case of increase in the value of Collaterals, stock brokers may have the option of granting further exposure to their clients subject to applicable haircuts.
• However, no such exposure shall be permitted on the increased value of Funded stocks.
• In case the funded stock is considered towards maintenance margin to the extent of cash collateral provided by the client, the Trading Member shall ensure that the funded stock considered is under Group 1 securities. The applicable margin shall be VaR + 5 times of Extreme Loss Margin, irrespective of whether the funded stock is available in the F&O segment or not.

The workbook's worked examples. A client buys 1 quantity of a Group 1 F&O stock at ₹100, with VaR 12.5% and ELM 5%.

Initial margin = VaR + 3 × ELM = 12.5 + 15 = 27.5% of ₹100 = ₹27.50.

Example 1 — the cash was used for pay-in. If the ₹27.50 has been used for pay-in, i.e. settlement obligation of the client on settlement day, and funded stock received from CC to the extent of such cash used for pay-in is being maintained for margin purpose, then funded value, i.e. exposure, would be ₹72.50, and the margin rate becomes VaR + 5 × ELM = 12.5 + 25 = 37.5% on the cost of funded stock or market value of the funded stock, whichever is lower — i.e. on ₹72.50.

Example 2 — the cash was not used for pay-in. If the initial margin given in cash is not used for pay-in and is being maintained with the member for margin purpose and upstreamed to CC and allocated to the respective client, then funded value, i.e. exposure, would be ₹100, and the rate would remain the same, i.e. VaR + 3 times of ELM = 27.5% on ₹100.

The general rules that follow: the initial margin for availing MTF is collected on the purchase value of funded shares. The maintenance margin is maintained for all the open funded positions at all times on the cost of funded stock or market value of the funded stock, whichever is lower. Members shall also ensure to collect Mark to Market margin (in the form of cash or non-cash collateral) in cases where the market value of the funded stock is less than the funded cost of the stock.

The MTM example: a client buys 1 quantity of a Group 1 F&O scrip at ₹100, closing at ₹100 on T and ₹90 on T+1, with margin collected in non-cash form.

Liquidation on default

The stock broker shall list out situations/conditions in which the securities may be liquidated, and such situations shall be included in the "Rights and Obligations Document" — but not exceeding 5 working days from the day of margin call.

The broker shall liquidate the securities if the client fails to meet the margin call. However, the broker shall not liquidate or use in any manner the securities of the client in any situation other than the conditions stated above.

Sources of funds

A stock broker may use own funds or borrow funds from scheduled commercial banks and/or NBFCs regulated by RBI. Stock brokers may borrow funds by way of issuance of Commercial Paper and by way of unsecured long term loans from their promoters and directors — CP issuance subject to compliance with appropriate RBI Guidelines, and promoter/director loans subject to the appropriate provisions of the Companies Act 2013.

A stock broker shall not be permitted to borrow funds from any other source.

And the client-money prohibition: the stock broker shall not use the funds of any client for providing the margin trading facility to another client, even if the same is authorized by the first client.

Leverage and exposure limits

Total indebtedness: at any point of time, the total indebtedness of a broker for the purpose of margin trading shall not exceed 5 times of his net worth. The workbook's example: if the net worth of Member X is ₹3 crores, then the total indebtedness for the purpose of MTF shall not exceed ₹15 crores.

Maximum allowable exposure: shall be within the self-imposed prudential limits and shall not, in any case, exceed the borrowed funds and 50% of his net worth. The workbook's example: if the net worth of Member X is ₹3 crores and total borrowings is ₹1 crore, then the total exposure permitted shall not exceed ₹2.5 crores (1 + 50% of 3 = 2.5).

Exposure = Outstanding funded amount − cash collateral used for pay-in.

Single client limit: exposure to any single client at any point of time shall not exceed 10% of the broker's maximum allowable exposure.

The workbook's table:

And diversification: exposure towards stocks and units of equity ETF purchased under margin trading facility, and collateral kept in the form of stocks and units of equity ETF, are well diversified. Stock brokers shall have an appropriate Board approved policy in this regard.

Records, audit and disclosure

• Separate client-wise ledgers for funds and securities of clients availing margin trading facility.
• A separate record of details of the funds used and sources of funds.
• The books of accounts with respect to the margin trading facility shall be audited on a half yearly basis, with an auditor's certificate submitted to the exchange within one month from the date of the half year ending 31st March and 30th September, certifying the extent of compliance with the conditions of margin trading facility. The certificate shall be in addition to the certificate on net worth.
• Disclosure to the Stock Exchanges on or before 6 pm on T+1 day of gross exposure towards margin trading facility including name of the client, category of holding (promoter/promoter group or non-promoter), clients' PAN, name of the scrips (collateral stocks and funded stocks), and if the broker has borrowed funds, the name of the lender and amount borrowed.
• The Stock Exchanges shall disclose on their websites the scrip wise and Equity ETF gross outstanding in margin accounts with all brokers, available after the trading hours, on the following day.

Other conditions

A broker shall take adequate care and exercise due diligence before providing margin trading facility to any client.

Any disputes arising between the client and the stock broker in connection with the margin trading facility shall have the same treatment as normal trades and should be covered under the investor grievance redressal mechanism and arbitration mechanism of the Stock Exchange.

But the protection funds do not fully extend: SGF and IPF shall be available for transactions done on the exchange, whether through normal or margin trading facility. However, any losses suffered in connection with the margin trading facility availed by the client from the stock broker shall not be covered under IPF.

How funded stocks are held: funded stocks held by the TM/CM under the margin trading facility shall be held by the TM/CM only by way of pledge. For this purpose, the TM/CM shall be required to open a separate demat account tagged "Client Securities under Margin Funding Account", in which only funded stocks in respect of margin funding shall be kept or transferred, and no other transactions shall be permitted.

And the mechanism: such funded stocks shall be transferred to the respective client's demat account followed by creation of an auto-pledge — i.e. without the requirement of a specific instruction from the client — with suitable reason, in favour of "Client Securities under Margin Funding Account".

Internet Based Trading and wireless trading

Internet Based Trading can take place through order routing systems, which route client orders to exchange trading systems for execution of trades.

SEBI Registered Brokers can introduce this service after obtaining permission from respective Stock Exchanges. The stock exchange should grant approval or reject the application and communicate its decision to the member within 7 calendar days of the date of the completed application.

SEBI registered brokers who provide Internet Based Trading shall be eligible to provide securities trading using wireless technology. All relevant requirements applicable to internet based trading shall also be applicable to securities trading using wireless technology. STWT shall include devices such as mobile phone, laptop with data card, that use Internet Protocol.

The minimum conditions

Net worth: the broker must have a minimum net worth of ₹50 lakh if the broker is providing the Internet based facility on his own. However, if some brokers collectively approach a service provider for providing the internet based trading facility, net worth criteria as stipulated by the stock exchange will apply.

Operational and system requirements: the exchange must ensure provision for security, reliability and confidentiality of data through use of encryption technology, adequate backup systems and data storage capacity, adequate system capacity for handling data transfer, alternative means of communications in case of Internet link failure, and minimum qualification for personnel to handle communication including trading instructions as well as other back office work.

Client-broker relationship: additional rights and obligations provided to client in case of internet/wireless technology-based trading. The broker web site should contain information meant for investor protection such as rules and regulations affecting client broker relationship, arbitration rules, investor protection rules, and provide and display prominently a hyperlink to the website of the relevant stock exchange displaying rules/regulations/circulars. Ticker/quote/order book displayed on the website should display the time stamp as well as the source of such information. Order/trade confirmation should also be sent to the investor through email at the client's discretion.

Risk management: brokers must have a system-based control on the trading limits of clients and exposures taken by clients. Brokers must set pre-defined limits on the exposure and turnover of each client. The broker systems should be capable of assessing the risk of the client as soon as the order comes in.

Cross trades: brokers using Internet based systems for routing client orders will not be allowed to cross trades of their clients with each other. All orders must be offered to the market for matching.

Standards for web interfaces: Interface Standards as per recommendations of IETF (Internet Engineering Task Force) and W3C (World Wide Web Consortium) may be adopted — for example HTTP Ver 4 or above, HTML Ver 4/XML.

System operations: brokers should follow the similar logic/priorities used by the Exchange to treat client orders, maintain all activities/alerts log with audit trail facility, and the Broker Web Server should have internally generated unique numbering for all client orders/trades.

Network security — mandatory for all Internet based trading systems:

• (a) User Id.
• (b) First Level password.
• (c) Automatic expiry of passwords at the end of a reasonable duration, with re-initialised access on entering fresh passwords.
• (d) All transaction logs with proper audit facilities maintained in the system.
• (e) Secured Socket Level Security for server access through Internet.
• (f) Suitable Firewalls between the trading set-up directly connected to an Exchange trading system and the Internet trading set-up.

Further requirements

• There shall be secure access, encryption and security of communication. DOT policy and regulation shall govern the level of encryption.
• Adequate measures for user identification, authentication and access control using means such as user-id, passwords, smart cards, biometric devices or other reliable means.
• Unique identification number as given in case of internet-based trading shall be made applicable for securities trading using wireless technology.
• In case of failure of the wireless network, alternative means of communication for placing orders should be available.
• Additional provisions specifying possible risks, responsibilities and liabilities should be incorporated in the Broker-Client agreement as an addendum.
• As it may not be possible to give detailed information on a hand-held device, minimum information may be given with addresses of the web site where detailed information would be available.
• Order confirmation should be provided on submitting the order. Order modification/cancellation facilities should also be provided. Trade confirmation should be provided, along with history of trades for the day.
• Session login details should not be stored on the devices used.
• The broker's server routing orders to the exchange trading system shall be located in India.
• Stock exchanges shall arrange for periodic systems audits of broker systems.

And for IBT and STWT specifically:

• The broker shall capture the IP address from where the orders are originating.
• The broker's system should have built-in high system availability to address any single point failure.
• Secure end-to-end encryption for all data transmission between the client and the broker through a Secure Standardized Protocol.
• A procedure of mutual authentication between the client and the broker server.
• In case of no activity by the client, the system should provide for automatic trading session logout.
• Two-factor authentication for login session may be implemented for all orders emanating using Internet Protocol. Public Key Infrastructure based implementation using digital signatures is advisable. And a rule worth remembering: the two factors in the Two-factor authentication framework should not be same.
• The back-up and restore systems should be adequate to deliver sustained performance and high availability, with on-site as well as remote site back-up capabilities.

Testing of software: test market facility including Simulated Environment is provided by the exchange to the members for testing their software — where "software" shall mean electronic systems or applications used for connecting to the stock exchanges and for the purposes of trading and real-time risk management, including software used for IBT, DMA, STWT, Smart Order Routing and Algorithmic Trading.

The stock broker shall undertake UAT of the software to satisfy itself that the newly developed/modified software meets its requirements, and shall engage system auditor(s) to examine reports of mock tests and UAT in order to certify that the tests were satisfactorily undertaken.

And on periodic audit: stock brokers would be required to submit the System Audit Report on a periodic basis to the Exchange after getting the facility audited from a CISA/CISSP/ISA/DISA certified auditor.