PRATIP KAR

EXECUTIVE DIRECTOR

DNPD/Cir- 22 /04

April 01, 2004

To

All Stock Exchanges, Depositories and Custodians.

Dear Sir,

 Mandatory use of STP system for all institutional trades executed on the stock exchanges.

Straight Through Processing (STP) is generally understood to be a mechanism that automates the end to end processing of transactions of financial instruments. It involves use of a system to process or control all elements of the work flow of a financial transaction, what are commonly known as the Front, Middle, Back office and General Ledger. In other words, STP allows electronic capturing and processing of transactions in one pass from the point of order origination to final settlement. STP thus streamlines the process of trade execution and settlement and avoids manual entry and re-entry of the details of the same trade by different market intermediaries and participants. Usage of STP enables orders to be processed, confirmed, settled in a shorter time period and in a more cost effective manner with fewer errors. Apart from compressing the clearing and settlement time, STP also provides a flexible, cost effective infrastructure, which enables e-business expansion through online processing and access to enterprise data.

SEBI vide letter dated October 3, 2002 informed the stock exchanges, depositories and custodians that it proposed to introduce STP for electronic trade processing with a common messaging standard ISO 15022 w.e.f December 2, 2002. Accordingly, STP was launched in India on November 30, 2002. Currently, STP is being used by the market participants on a voluntary basis. To facilitate STP, SEBI has also issued circulars SMDRP/POLICY/Cir-15/00 dated December 15, 2000 & circular SEBI/SMD/SE/15/2003/29/04 dated April 29, 2003 which permitted the issue of electronic contract notes with digital signature obtained from a valid Certifying Authority provided under the Information Technology Act, 2000 (IT Act) and circular no. DNPD/Cir-9/04 dated February 3, 2004 & circular no. SEBI/MRD/SE/Cir-11/2004 dated February 25, 2004 directing exchanges to amend their bye-laws, rules and regulations for the equity and the debt segment to streamline the issuance of electronic contract notes as a legal document like the physical contract note. Exchanges are in the process of amending their bye-laws, rules and regulations.

While several STP Service Providers have been providing STP service to the market participants, however, there was no inter-operability between the STP Service Providers.

To resolve the issue of inter-operability between the STP Service Providers, it has been decided in consultation with the stock exchanges and the STP Service Providers that a STP Centralised Hub would be setup. Currently this STP Centralised Hub has been setup and made operational by NSE. NSE has obtained the necessary approvals from Department of Telecommunications (DoT) as an Internet Service Provider (ISP). Subsequently this STP Centralised Hub would be further developed jointly with BSE.

In view of the aforesaid developments, it has been decided that all the institutional trades executed on the stock exchanges would be mandatorily processed through the STP System w.e.f July 01, 2004. This circular is being issued to provide adequate notice to the market and market participants about the mandatory use of STP Service for institutional trades. A circular containing the detailed process flow, role and responsibilities of the STP Service Providers and the STP Centralised Hub, standard agreement between the STP Service Providers and the STP Centralised Hub would be issued shortly..

This circular is being issued in exercise of powers conferred by section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with section 10 of the Securities Contracts(regulation) Act 1956, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Yours faithfully,

PRATIP KAR

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