SMD/Policy/Cir-43/2000

September 12, 2000

To:

The President/Executive Director/

Managing Director Of all the Stock Exchanges

Sir/Madam,

Carry Forward, Automated Lending & Borrowing and Continuous Net Settlement in the Rolling Settlement.

A meeting of the Stock Exchanges which have the facilities of carry forward and automated lending and borrowing was held on August 23, 2000 at SEBI to discuss the preparedness of the stock exchanges for the introduction of carry forward, automated lending & borrowing and the continuous net settlement in the rolling settlement. Earlier, SEBI Board in its meeting held on June 14, 2000 considered and approved the proposals of the carry forward and the continuous net settlement system in the rolling settlement. The features of the carry forward, automated lending & borrowing and the continuous net settlement in the rolling settlement were discussed in the meeting of the exchanges held on August 23, 2000.

1) Salient Features

a) Carry Forward under Rolling Settlement (CFRS):

There would be carry forward session at the end of each trading day and, the investor would have a choice of carrying forward a position for 1, 2, 3, 4 or 5 trading days. There would be separate screens where bids and offers could be posted for each of these five variants. During the term of a carry forward for greater than 1 day the investor may square off the carry forward position. In such a case, the investor would first have to square-off the position in the market by carrying out appropriate buy/sell transaction and then do a contra carry forward for the remaining period of the carry forward. e.g. an investor who carries forward for one week (5 trading days) today, would be able to square off tomorrow by taking an offsetting position tomorrow and carrying it forward in the four day carry forward market.

b)Automated Lending and Borrowing under Rolling Settlement (ALBRS)

The ALBM session would be held everyday and would involve lending and borrowing for 1, 2, 3, 4 or 5 working days. The separate screens will provide the facility for lending/borrowing for these five variants. Thus, for the ALBM session held on day T the first leg will be settled on T+5 day. For a one day tenure lending, the reverse leg will be created on T+1 day and will be settled on T+6 day. Similarly, in case of a 2 day tenure lending, the reverse leg will be created on T+2 day and will be settled on T+7 day and so on.

c) Continuos Net Settlement (CNS)

Internationally, the CNS has been effectively employed by the clearing corporations for the settlement of transactions and for maintaining an orderly flow of money and securities. The CNS is carried out by the Clearing Corporation / Clearing House as a post settlement processing whereby, the seller who has failed to deliver securities can postpone the settlement

of his obligations to the subsequent settlement. This is primarily a tool for imparting flexibility to the seller.

The key features of the CNS are as under :

• The CNS would be available only in the Compulsory Rolling Settlement segment.

• CNS is essentially post settlement processing.

• The CNS is delivery initiated.

• In the CNS process, the short deliveries of the seller are marked to the closing price of the day and the corresponding amount is debited to the delivering member.

• The settlement of the CNS positions is postponed to subsequent settlement.

• Since the CNS is a post settlement activity, the receiving member has to necessarily fulfil his funds pay-in obligation. The receiving member however would be subsequently credited for the value of the deliveries to the extent that he has received short.

• The receiving member has the option of insisting on delivery. The members can indicate the preference for compulsory receipt of delivery in which case it will be allocated higher priority for delivery receipt. In the event of failure to deliver shares to such receiving members, these positions would be removed from the CNS and subjected to compulsory delivery. Compulsory buy-in or close-out would be effected in the event of failure to deliver.

2) Eligibility of Stock Exchanges

The Exchanges which have already implemented the MCFS or Automated Lending and Borrowing Mechanism (ALBM) as prescribed by SEBI in account period settlement would be eligible to implement CFRS and ALBRS respectively. The other Exchanges would seek the prior permission of SEBI for introduction of CFRS or ALBRS. The exchanges would have to seek prior permission of SEBI for the introduction of CNS. For obtaining such permissions the exchange must demonstrate that it has a well designed software, well established governance structure and administrative infrastructure for monitoring and enforcing the margining system and surveillance capability. If necessary, an inspection of the exchange would be carried out by the SEBI to satisfy itself.

3) Eligibility of scrips The criteria for scrips eligible for these products would be issued separately.

4) Risk Containment Measures Risk containment measures for these products would also be issued separately. Yours faithfully

P. K. BINDLISH

Division Chief

Secondary Market Depository,

Research & Publications Department e-mail : pkb@sebi.gov.in

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