FITTC/DC/CIR-3468/98
December 03, 1998
To,
The Executive Directors/ Managing Directors
of all Stock Exchanges.
Dear Sir,
SUB: Client Registration Form, Client Agreement, Clearing Member – Trading Member Agreement and Risk Disclosure Document for Derivatives Segment.
The Dr. L. C. Gupta Committee Report requires strict enforcement of ” Know Your Customer ” rule and requires that every client shall be registered with the derivatives broker. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the client the Risk Disclosure Document and obtain a copy of the same duly signed by the client.
Please find enclosed the model formats of the Client Application Form, Client Agreement, Clearing Member – Trading Member Agreement and the Risk Disclosure Document. The given format stipulates the mandatory clauses to be incorporated in the respective documents. These clauses should be part of these documents, however, exchanges may prescribe any additional clauses over and above these as considered necessary by them.
Yours faithfully,
O. P. GAHROTRA
SENIOR EXECUTIVE DIRECTOR
CLIENT APPLICATION FORM
(The details given hereunder should be included in all client application forms. Exchanges may prescribe any additional disclosure requirement. )
TRADING MEMBER’S CLEARING MEMBER’S
Name, Address, Telephone No., Name, Address, Telephone No.,
SEBI Registration No. SEBI Registration No.
(if clearing member other
than trading member)
Client Details
Name of Account Holder :
Sex : Male/Female :
Date of Birth :
Address Telephone, Fax Number (Residence) :
Occupation :
Name of Employer :
Address, Telephone, Fax Number (Office) :
Type of account : Individual/ HUF/ Partnership/ Corporate/ FI/ MF/ NBFC/ FII/Other
Purpose : Speculative/Hedge
Educational Qualification :
Investment Experience : years in Stocks years in Derivatives years in any other investment related field Particulars of the Bank AccountName of the Bank :
Branch ( Address & Tel No ) :
Bank Account Number :
Income range :Below Rs. 100000
Rs. 100000 to Rs. 200000
Rs. 200000 to Rs. 500000
Above Rs. 500000
Income Tax PAN No. :
Whether registered with any other broker – member :
Name of Broker :
Name of Exchange :
Client Code No. :
References/ Introducing Client : Name and Client code
Date : Signature :
For Office Purposes :
Name of the Salesperson :
Account approved by : Date :
Note :
Copy of any one of the following proof of identity should be submitted – Passport/ Driving License/ Ration Card/ Voters Identity Card
Each client has to use one registration form. In case of joint names/family members please submit separate form for each person.
In case of partnership firm/ corporate entities the above mentioned details should be obtained for the partners/ directors/ authorized persons. Such entities shall also provide copies of partnership deed/ Memorandum, Article of Association, Board resolution authorizing any person to trade derivatives and Annual Report/ Accounts of the firm/company as applicable.
In case of individuals, a copy of income tax return should be obtained if he is a tax payer.
Original documents may be verified at the time of filing of application.
CLIENT AGREEMENT
The Client Application Form shall be accompanied with the Client Agreement. The agreement should cover details all issues that clearly define the relationship and the extent of liabilities between the client and trading/clearing member. The following areas are to be included in the agreement, however, the broker/exchange may prescribe additional clauses as considered necessary by them :
Change in information : In case there is any change in the information provided by the client to the member at the time of opening the account, the client shall immediately notify the member of such change in writing.
Client’s understanding of risks involved in derivatives trading : The agreement shall clearly specify the client’s responsibility for all investment decisions and his complete understanding of the risks involved in trading of various derivatives contracts. The member shall ensure that the client has read and signed the Risk Disclosure Document. Even if the client has failed to understand the risk involved or the member has failed to explain the risk to the client, the trading contract will not be void or voidable and the client shall be responsible for all the risk and consequences for entering into derivatives trading.
Types of services offered : The agreement shall specify the nature of services provided by the broker e.g. trading facilities, clearing facilities, advisory services, portfolio management services etc.
Commissions, Brokerage, other fees : The agreement shall indicate the rate of brokerage/ commission/ fee charged by the broker in respect of various services provided by the member. The broker shall not charge brokerage more then the maximum brokerage permitted as per the rules, regulations and bye-laws of the exchange/SEBI.
Exposure Limits : The client agrees to abide by the exposure limits if any, set by the trading/clearing member, exchange or SEBI from time to time.
Payment of margins : The client’s liability to pay margins as required by the trading/ clearing member or exchange or clearing corporation/house within the stipulated time should be clearly specified. It should be indicated that if the broker finds it necessary, he is authorised to levy and collect additional margin over and above those imposed by the exchange/ clearing corporation and the client shall be liable to pay the margins within the stipulated time.
Liquidation/close-out of positions : The broker shall have the authority to liquidate/close-out positions of the client for non-payment of margins, outstanding debts etc. Any amount of loss caused would be charged to the client in such an event.
Liability to reimburse losses : The agreement shall specify the liability of the client to reimburse any losses or financial charges arising from liquidation/close-out of positions by the member as mentioned above.
Segregation of client money : The money deposited by the client shall be kept in a separate account by the member, distinct from his own account and cannot be used by the broker for himself or for any purpose other than the purpose mentioned by the client.
Provisions in case of Default : In the event of a default of a trading/clearing member on his own account, the client money will not be utilised to meet the brokers liabilities. In such cases the client’s positions shall be either transferred to another solvent broker or closed-out as per the provisions of the exchange/clearing corporation. The loss if any caused to the client because of such action would be recoverable from trading/clearing member.
In the event of failure of a client/investor to fulfill his obligation to broker/ clearing corporation his position could be closed-out and money, if any, available with the trading/clearing member/clearing corporation could be adjusted against his liabilities/ obligation.
Sharing of information : The client agrees to furnish information immediately if any winding up petition or insolvency petition has been filed against him or any gashnishee order has been served by a bank, etc. Similarly, trading member agrees to inform client immediately about the contract specifications and associated obligations, daily settlement position, etc. The member should also inform the client if the price of the index has moved against the client.
Abiding by SEBI/ Stock Exchange /Clearing Corporation Rules and Regulations : A client agrees to be bound by all the rules and regulations of SEBI and the Bye-laws, rules and regulations of the exchange and clearing corporation. Further, the client and member should agree to refer the dispute to the arbitration as per the bye-laws of the exchange.
Any other clauses : The agreement may contain any other additional provisions as considered necessary by the broker/ exchanges.
RISK DISCLOSURE DOCUMENT
(This document should be read by each and every prospective client before entering into derivatives trading and a signed copy should be obtained by the broker from all the clients.)
The following text should be part of all the risk disclosure documents. Exchanges may prescribe any additional disclosure requirements considered necessary by them
High Leverage :
The amount of initial margin required to open a position in the futures market is relatively small compared to the size of the futures contract. This makes futures contracts a highly leveraged instrument. A proper understanding of the effect of leverage – and how it can work to your advantage or disadvantage – is essential before commencing trading in futures. If you speculate in the futures contracts and the price moves in your direction it can produce large profits as compared to your initial margin. However, if prices move against you it can produce large losses in relation to your initial margin – sometimes wiping away your principal investment.
You should therefore completely understand the following statements before actually trading in stock index futures and also trade with caution after taking into account one’s circumstances, financial resources, etc.
If the futures price moves against you, you may lose a part or whole of the margin amount in a relatively short period of time. Moreover, the loss may exceed the original margin amount.
Futures trading involves daily settlement of all positions. Every day the open positions are market to market based on the closing level of the index. If the index has moved against you, you will be required to deposit the amount of loss (notional) resulting from such movement. This margin will have to be paid within a stipulated time frame, generally before commencement of trading next day.
In order to maintain market stability, the following steps may be adopted sometimes – changes in the margin rate, increases in the cash margin rate, decrease in position limits etc. These new measures may be applied to the existing open positions. In such conditions, you will be required to put up additional margins or reduce your position.
If you fail to deposit the additional margin by the deadline or if an outstanding debt occurs in your account, the broker/member may liquidate a part or whole of the position or pledged securities. In such cases you will be liable for any losses incurred due to such close-outs.
Under certain market conditions, you may find it difficult or impossible to execute transactions or close your open positions. This may happen due to various factors such as illiquidity i.e. when there are insufficient bids or offers or suspension of trading due to price limits or circuit breakers etc.
You should familiarise yourself with the protections accorded to the money or other property you deposit with the broker member, particularly in case of insolvency or bankruptcy of the member. The extent to which you may recover your money or property may be governed by specific legislation or local rules. Such details should be clarified before commencement of trading in futures. In case of any dispute with the member, the same shall be subject to arbitration as per the bye-laws/ regulations of the exchange.
You are required to provide all the details as mentioned in the Client application from. You must read the customer agreement in detail before signing this document. The relationship between the client and the broker member shall also be subject to the bye-laws of the exchange/clearing corporation relating to the relationship between the client and the member as applicable.
Before you begin to trade, you should obtain a clear explanation of all commission, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss.
You must ask your broker to provide the full details of the futures contracts you plan to trade i.e. the contract specifications and the associated obligations.
The Exchange offers electronic trading facilities which are computer-based systems for order-routing, execution, matching, registration or clearing of trades. As with all facilities and systems, they are vulnerable to temporary disruption or failure. Your ability to recover certain losses may be subject to limits on liability imposed by the system provider, the market, the clearing house and/or Member firms. Such limits may vary; you should ask the firm with which you deal for details in this respect.
Investors must keep in mind that the aforementioned statements cannot disclose all the risks and the characteristics of futures trading. Therefore, investors contemplating trading in the futures market should do so after understanding the mechanisms and the relevant provisions of such trading.
The Derivative Exchange/Segment is not commenting on the merits of participating in this trading Segment nor has the Derivative Exchange/Segment passed the adequacy or accuracy of this disclosure document. This brief statement does not disclose all of the risks and other significant aspects of trading. In light of the risks, you should undertake such transactions only if you understand the nature of the contracts (and contractual relationships) into which you are entering and the extent of your exposure to risk. Risk of loss in trading in derivatives can be substantial. You should carefully consider whether trading is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. Futures trading thus requires not only the necessary financial resources but also the financial and emotional temperament. If you cannot afford the risk or if you are uncomfortable with the risk, the only sound advice is don’t trade. In case of any consequences or loss in the derivatives segment, the client shall be solely responsible for such loss and the exchange or SEBI shall not be responsible for the same and it will not be open to the client to take the plea that no adequate disclosure was made or he was not explained the full risk involved by the member. The client will be solely responsible for the consequences and no contract can be rescinded on that account.
I hereby acknowledge that I have received and understood this risk disclosure statement.
Customer Signature Date
CLEARING MEMBER – TRADING MEMBER AGREEMENT
The Clearing Member and the Trading Member shall enter into an agreement which should clearly state the nature of relationship between the two and should specify the duties, responsibilities, obligations and code of conduct of the concerned parties. The Clearing Member shall enter into a separate agreement with each of the trading member on whose behalf he will be clearing trades. The following points are to be included in the agreement, however, the member/exchange/clearing corporation may prescribe additional clauses as considered necessary by them :
Deposit from Trading Member – The Clearing Member shall specify the amount of deposit that would be required to be deposited by the trading member with the clearing member. It shall include the details of the minimum deposit at any point in time, the mode of payment, steps that can be taken by the clearing member in case of any shortfall e.g. restriction on further trading, close-out of open positions etc.. This shall be as agreed by the two parties or as prescribed by the relevant authority from time to time.
Exposure limit – The agreement shall include the exposure limit details applicable to the trading member. Such limits may be decided by the clearing member, subject to the requirements prescribed by the relevant authority from to time to time. The agreement shall also specify the actions to be taken in case of an exposure limit violation e.g. the agreement may empower the clearing member to close-out open positions of the trading member or withdraw/disable the trading facility of the trading member by intimation to the exchange/clearing corporation.
Commissions, Brokerage, other fees : The agreement shall indicate the rate of brokerage/ commission/ fee charged by the clearing member in respect of various services provided by him.
Types of services offered : The agreement shall specify the nature of services provided by the clearing member e.g. clearing service, advisory services, portfolio management services etc.
Payment of margins : The clearing member shall collect margins from the trading member as prescribed by the relevant authority from time to time. However, if the clearing member finds it necessary, he shall be authorized to levy and collect additional margin over and above those imposed by the exchange/ clearing corporation and the trading member shall be liable to pay the margins within the stipulated time. Also, the clearing member shall ensure that the trading member collects margins from his clients on a gross basis.
Liquidation/close-out of positions : The clearing member shall have the authority to liquidate/close-out positions of the trading member for non-payment of margins, outstanding dues etc.
Liability to reimburse losses : The agreement shall specify the liability of the trading member to reimburse any losses or financial charges arising from liquidation/close-out of positions by the clearing member as mentioned above.
Client Registration by the trading member – The clearing member shall ensure that the trading member undertakes registration of all his clients and that the requirements of Know Your Client and Risk Disclosure Document are complied with. The trading member shall provide such details to the clearing member.
Segregation of client money : The money deposited by the clients shall be kept in a separate account by the trading member, distinct from his own account and he shall provide the details to the clearing member.
Client Identification – In order to enable the shifting of positions and safeguarding the money of clients, as stated above, it is necessary to be able to identify the individual client positions. Figure 1.1 below shows the various persons connected to the clearing member at different levels who could have open positions.
Thus in order to have the identity of the trading member’s clients it is necessary to structure the client codes in such a way that identify the actual person to whom the open position belongs.
Default by Trading Member : In the event of a default of the trading member on his own account, the client money shall remain safe and shall not be utilized to meet the trading members liabilities. In such cases the client’s positions shall be transferred to the clearing member or another trading member.
In the event of a default due to failure of a specific client to fulfill his obligation, the money of other clients shall remain safe and cannot be utilized to meet the obligation of the defaulting client.
Default by Clearing Member – In the event of default by clearing member on his own account, the money of the clearing member’s clients, trading members own account and trading members’ clients shall remain safe and shall not be utilized to meet the clearing members liabilities. In such cases the positions of the clients and the trading members shall be transferable to some other clearing member.
Loss on account of close out of client positions because of failure of clearing member/trading member would be recovered from the clearing/trading member.
Intimation to exchange in cases of default of the trading member : The clearing member shall immediately inform the exchange/clearing corporation in case a trading member has defaulted in his payments.
Arbitration : In case of disputes between the clearing member and trading member, the case shall be referred for arbitration as per the Stock Exchange/ clearing corporation bye-laws/regulations/procedures.
The agreement shall elaborate the Clearing member’s rights and responsibilities vis-à-vis trading members and derivatives exchange/ clearing corporation.
Any other clauses : The agreement may contain any other additional provisions as considered necessary by the broker/ exchanges/clearing corporation.
