AISSCE -2025

FINANCIAL MARKET MANAGEMENT (FMM) – 805

SECTION – A
(1 / 2 Mark (s) )
1. What are the two interdependent segments of securities market?
Ans. Primary Market and Secondary Market
2. Define Demutualization?
Ans. Demutualization: NSE set up with a pure demutualised governance structure,
having ownership, management and trading with three different sets of people.
3. Define dematerialization?
Ans. The Procedure of transfer of securities from physical form to electronic form is
called dematerialization.
4. How Net Worth of the member is calculated?
Ans. The Net Worth of the member is calculated as summation of Capital and free
reserves less non allowable assets.
5. What is unwarrantable business of the member?
Ans. Unwarrantable business: effects purchases or sales for its constituent’s account
or for any account in which it is directly or indirectly interested which purchases or sales
are excessive in view of its constituent’s or its own means and financial resources or in
view of the market for such security.
6. What is Unique Client Code?
Ans. SEBI has made it mandatory for all trading members/brokers to use unique client
codes for all clients
7. What is VSAT System?
Ans. A very small aperture terminal (VSAT) is a two-way ground station that transmits
and receives data from satellites. NSE has a main computer which is connected through
Very Small Aperture Terminal (VSAT) installed at NSE office.
8. What pay in day mean?
Ans. Pay-in day is the day when the trading members/brokers are required to make
payment of funds or delivery of securities to the clearing corporation of the Exchange for
all transactions traded by or through them in the respective settlement period.
9. Describe Direct Payout to Investor?
Ans. client receives the pay out of securities directly to their accounts on the pay-out
day. The client receives payout to the extent of instructions received from the respective
clearing members.
10. What is short delivery?
Ans. A short delivery/failed delivery takes place when a broker, a custodian or the
clearing corporation delivers fewer securities than what were contracted for either to
another broker, a custodian or the clearing corporation on Pay in Day .
11. Give an example of a company objection?
Ans. A company objection(s) arise when documents for securities transfer are returned
due to signature mismatch or for any other reason.
12. In which year SEBI Prohibition of Insider Trading Act was announced?
Ans. The SEBI Prohibition of Insider Trading Act was announced in 1992.
13. Define Index?
Ans: An Index is used to give information about the price movements of products in the
financial, commodities or any other markets
14. Extend the term IEPF?
Ans: Investor Education and Protection Fund (IEPF).
15. Define Open Book?
Ans: the order book is visible to all market participants; it is termed as an Open Book
16.Whose are called Arbitrageur?
Ans:
1. They take positions in financial markets to earn riskless profits.
2. The arbitrageurs take short and long positions in the same or different contracts at
the same time to create a position.(1+1)
17. Define Intrinsic Value of Option?
Ans:
1. Intrinsic value of an option at a given time is the amount the holder of the option will
get if he exercises the option at that time.
2. The intrinsic value of a call is Max [0, (St — K)] which means that the intrinsic value
of a call is the greater of 0.
18. Define Out of the Money?
Ans:
1. An out-of-the-money (OTM) option would lead to a negative cash flow if it were
exercised immediately.
2. A call option on the index is out-of-the-money when the current index st
20. Describe Internet Trading?
Ans: It provides web-based access to investors to trade directly on the Exchange.
The orders originating from the PCs of the investors are routed through the Internet to
the trading terminals of the designated brokers with whom they are connected and
further to the Exchange for trade execution.
21. What Securities Pay-in and pay-out Mean?
Ans: Securities Pay-in: The process of delivering securities to the clearing corporation
to effect settlement of a sale transaction. Securities Pay-out: The process of receiving
securities from the clearing corporation to complete the securities settlement of a
purchase transaction. (
22. What is Extreme loss margin and how it collects?
Ans:
1. Extreme loss margin is additional upfront margin on VaR.
2. The Extreme Loss Margin is collected/ adjusted against the total liquid assets of the
member on a real time basis.
23. Classify derivative trades on the basis of Place of Trade?
Ans: Derivatives can either be traded over the counter (OTC) or on an organized
exchange.. 1. Usually forwards, some types of options, swaps exotic products are
OTC derivatives. 2. Futures, exchange-traded options are exchange traded
derivatives.
24. Define Index?
Ans: An Index is used to give information about the price movements of products in the
financial, commodities or any other markets.
25. Define Open Book?
Ans: the order book is visible to all market participants; it is termed as an Open Book.
26. What ‘XB’ indicate?
Ans: Ex-Bonus (if not entitle to receive Dividend)
27. How much maximum amount allow trading in Basket Trading?
Ans: The amount entered is in lakh and must be less than or equal to Rs. 3000 lakh.
28. Name the Clearing Corporation of National Stock Exchange?
Ans: NSCCL (National Securities Clearing Corporations Ltd.)
29. What is Rolling settlement?
Ans: Rolling settlement refers to the settling of trades at a standard fixed period of days
after the execution occurred (i.e. T+2).
30. What is Valuation Debit?
Ans: an amount equivalent to the securities not delivered by member valued at the
valuation price (the closing price on the day previous to the day of valuation).
31. Define European Option.
Ans: An option can be exercised at the expiry of the contract period known as European
option contract.
32. What Far Month indicates in Derivatives Contract?
Ans: It’s Three Months Contract.
33. What is Short position in future and Option Contract?
Ans: short position (sell position)
34. Define Basis?
Ans: Basis is defined as the futures price minus the spot price.
35. Name the process of delivering securities to the clearing corporation to effect
settlement of a sale transaction?
Answer : Pay-in of Securities
36. What is Novation?
Answer: NSCCL becomes the legal counterparty to the net settlement obligations of
every member. This principle is called ‘novation’.
37. At what price Valuation debit take place?
Answer: The closing price on the day previous to the day of valuation.
38. What do you mean by European option contract?
Answer: An option can be exercised at the expiry of the contract period.
39.Which contract price is generally not available in public domain?
Answer: Forward Contract
40. Define Initial Margin for Future contract.
Answer: The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin.
41. Who is called Writer of the option contract?
Answer: Seller of the Option Contract
42. What is Impact cost? Write its formula.
Answer: Impact cost represents the cost of executing a transaction in a given stock, for a
specific predefined order size, at any given point of time. It Measures the Liquidity. (1)
Formula : Impact Cost = Actual Price –Ideal Price x100 (1)
Ideal Price
43. Describe Pricing of Future.
Answer: The cost of carry model used for pricing futures. The Cost of carry is the cost
incurred when you hold a certain investment position. This includes interest costs, margin
expenses, financial expenses for advisors, fees etc. (1)
F = Se^rt
where:
r = Cost of financing (using continuously compounded interest rate)
T = Time till expiration in years
e =2.71828
44. Write the Economic Significance of Index Movements.
Answer:
1. News about the company- micro economic factors (e.g. a product launch, or the closure
of a factory, other factors specific to a company).
2. News about the economy – macro economic factors (e.g. budget announcements,
changes in tax structure and rates, political news such as change of national government,
other factors common to all companies in a country).
45. Describe Standard Form of Contract under the Indian Contract Act 1872.
Answer:
A standard form contract is a pre-established record of legal terms regularly used by a
business entity or firm in transactions with customers.
A Standard Form Contract is effective upon acceptance.
46. Who are called Registered owner and beneficiary owner under The Depositary
Act, 1996?
Answer:
Registered Owner is Depositary
Beneficiary Owner is Demat Account holder
47. What is Security Descriptor?
Information such as security name, book closure start and end dates, Ex-Date, No-
Delivery start and end dates, Tick Size, Daily price range, Face value, ISIN and remarks
is displayed in the security descriptor.
48. What is operational and legal Risk?
The operational risk arises from possible operational failures such as errors, fraud,
outages etc.
The legal risk arises if the laws or regulations do not support enforcement of settlement
obligations or are uncertain.
49. What are the rights enjoyed by Preference shareholders?
(a) payment of dividend at a fixed rate during the life time of the Company; and
(b) The return of capital on winding up of the Company.
50. Explain Impact Cost?
Impact cost is a practical and realistic measure of market liquidity; it is closer to the true
cost of execution faced by a trader in comparison to the bid-ask spread.
51. All Future contracts are square off at the expiry. What do you know about its
contract cycle?
It is the period over which a contract trades. The index futures contracts on the NSE
have one-month, two-month and three-month expiry cycles which expire on the last
Thursday of the month.
 SETION- B
(3 / 4 MARKS)
1. Discuss the market segments and their products?
Ans. (i) Wholesale Debt Market (WDM) Segment: This segment at NSE commenced
its operations in June 1994. It provides the trading platform for wide range of debt
securities which includes State and Central Government securities, T-Bills, PSU Bonds,
Corporate debentures, Commercial Papers, Certificate of Deposits etc.
(ii) Capital Market (CM) Segment: This segment at NSE commenced its operations in
November 1994. It offers a fully automated screen based trading system, known as the
National Exchange for Automated Trading (NEAT) system. Various types of securities
e.g. equity shares, warrants, debentures etc. are traded on this system.
2. Describe Arbitration?
Ans. Arbitration, which is a quasi judicial process, is an alternate dispute resolution
mechanism prescribed under the Arbitration and Conciliation Act, 1996. The Exchange
bye-laws prescribe the provisions in respect of arbitration and the procedure therein has
been prescribed in the regulations. The reference to arbitration should be filed within six
months from the date when the dispute arose. The time taken by the ISC is excluded by
the arbitrator, while considering the issue of limitation.
3. Write about temporary sign off?
Ans. Temporary Sign Off: Temporary sign off is a useful feature that allows the user to
disallow the use of the trading software without actually logging off. During a temporary
sign-off period, the application continues to receive all market updates in the
background.. If three attempts are made to sign on with an incorrect password, the user
is permanently logged off. In this case the user has to log on again.
4. How market information is displayed on market watch?
Ans. The online market information displayed in the market watch screen is for current
best price orders available in the Regular Lot book. For each security the following
information is displayed: a) The corporate action indicator “Ex/Cum” b) The total buy
order quantity available at best buy price c) Best buy price d) Best sell price e) Total sell
order quantity available at best sell price f) The last traded price g) The last trade price
change indicator and h) The no delivery period indicator “ND” i) The Percentage change
from previous day’s closing price’
5. Describe outstanding order window?
Ans. The purpose of Outstanding Orders is to enable the user to view the outstanding
orders for a security. An outstanding order is an order that has been entered by the
user, but which has not yet been completely traded or cancelled. The user is permitted
to see his orders. Special Features of Outstanding Orders a) The user can modify
orders from the outstanding orders screen. b) The user can cancel orders from the
outstanding orders screen. c) The user can view status of a particular order from the
outstanding orders screen.
6. Write the functions of clearing bank?
Ans. Functions of Clearing Banks The clearing banks are required to provide the
following services as a single window to all clearing members of National Securities
Clearing Corporation Ltd. as also to the clearing corporation: a) Branch network in cities
that cover bulk of the trading cum clearing members b) High level automation including
Real time gross settlement (RTGS)8 and electronic funds transfer (EFT) facilities
7. Write EPS and PE ratio with examples?
Ans. Earnings per Share (EPS): EPS measures the profit available to the equity
shareholders on a per share basis, that is, the amount that they can get on every share
held. It is calculated by dividing the profit available to the shareholders by number of
outstanding shares. The profit available to the ordinary shareholders is net profit after
taxes and preference dividend. EPS = Net profit after tax/number of ordinary shares
outstanding Price to Earnings Ratio: The P/E ratio reflects the price currently being
paid by the market for each rupee of currently reported EPS. It measures investors’
expectations and market appraisal of the performance of a firm. It is defined as: Price to
Earnings Ratio = Market Price of share/EPS
8. Explain key indicator of securities market?
Ans.1. Market Capitalization Ratio The market capitalization ratio is defined as market
capitalization of stocks divided by GDP. It is used as a measure of stock market size.
2. Turnover for a share is computed by multiplying the traded quantity with the price at
which the trade takes place. Similarly, to compute the turnover of the companies listed
at the Exchange we aggregate the traded value of all the companies traded on the
Exchange.
3. Turnover Ratio The turnover ratio is defined as the total value of shares traded on a
country’s stock Exchange for a particular period divided by market capitalization at the
end of the period. It is used as a measure of trading activity or liquidity in the stock
markets. Turnover Ratio = Turnover at Exchange / Market Capitalization at Exchange
9. Give detail of Index Based Market Wide Circuit Breaker?
Ans. Circuit Breakers The Exchange has implemented index-based market-wide
circuit breakers in compulsory rolling settlement with effect from July 02, 2001. In
addition to the circuit breakers, price bands are also applicable on individual securities.
Index-based Market-wide Circuit Breakers: The index-based market-wide circuit
breaker system applies at 3 stages of the index movement, either way viz. at 10%, 15%
and 20%. These circuit breakers when triggered bring about a coordinated trading halt
in all equity and equity derivative markets nationwide. The market-wide circuit breakers
are triggered by movement of either the BSE Sensex or the CNX Nifty, whichever is
breached earlier. a) In case of a 10% movement of either of these indices, there would
be a one-hour market halt if the movement takes place before 1:00 p.m. In case the
movement takes place at or after 1:00 p.m. but before 2:30 p.m. there would be trading
halt for ½ hour. In case movement takes place at or after 2:30 p.m. there will be no
trading halt at the 10% level and market shall continue trading. b) In case of a 15%
movement of either index, there would be a two-hour halt if the movement takes place
before 1 p.m. If the 15% trigger is reached on or after 1:00 p.m., but before 2:00 p.m.,
there shall be a one-hour halt. If the 15% trigger is reached on or after 2:00 p.m. the
trading shall halt for remainder of the day. c) In case of a 20% movement of the index,
trading shall be halted for the remainder of the day.
10. Explain corporate Hierarchy?
Ans. Trading System Users Hierarchy The trading member has the facility of defining a
hierarchy amongst its users of the NEAT system. The users of the trading system can
logon as either of the user type. The significance of each type is explained below:
I. Corporate Manager: The corporate manager is a term assigned to a user placed at
the highest level in a trading firm. Such a user receives the end-of-day reports for all
branches of the trading member. The facility to set branch order value limits and user
order value limits is available to the corporate manager. The corporate manager also
has facility to set symbol wise user order quantity limit. He can view outstanding orders
and trades of all users of the trading member and can also cancel/modify outstanding
orders of all users of the trading member.
II. Branch Manager: The branch manager is a term assigned to a user who is placed
under the corporate manager. The branch manager receives end-of-day reports for all
the dealers under that branch. He can set user order value limit for each of his branch.
He can view outstanding orders and trades of all users of his branch and can also
cancel/modify outstanding order of all users of his branch.
III. Dealer: Dealers are users at the lowest level of the hierarchy. A dealer can view and
perform order and trade related activities only for him and do not have access to
information on other dealers under either the same branch or other branches.
11. Explain Capital Gain Tax and its types under income tax act, 1996?
Ans. Capital Gains (Section 45) Any profits or gains arising from the transfer of a
capital asset effected in the previous year should, save as otherwise provided in
sections (54, 54B, 54D, 54E, 54EA, 54EB, 54F, 54G and 54H), be chargeable to
income-tax under the head ‘Capital gains’, and should be deemed to be the income of
the previous year in which the transfer took place. Types of Capital Gains 1. Long
term Capital Gain means capital gain arising from the transfer of a long term capital
asset more than 12 months in case of equity investments 2. Short term Capital Gain
means capital gain arising from the transfer of a short term capital asset less than one
year in case equity . Where the total income of an assesses includes any income,
arising from the transfer of a long-term capital asset, which is chargeable under the
head ‘Capital gains’, the tax payable by the assesses on the total income
12. Please write a short note on Depositories Act
Ans. A depository is required to enter into an agreement in the specified format with
one or more participants as its agent. Any person, through a participant, may enter into
an agreement, in such form as may be specified by the bye-laws, with any depository
for availing its services. A depository is deemed to be the registered owner for the
purpose of effecting transfer of ownership of security on behalf of a beneficial owner.
The depository as a registered owner does not have any voting rights or any other rights
in respect of securities held by it. The beneficial owner is entitled to all the rights and
benefits and is subjected to all the liabilities in respect of his securities held by a
depository.
13. Explain Indian Contract Act, 1872?
Ans. In the securities markets, the SCRA governs the contracts for or relating to the
purchase or sale of securities. However, the provisions of the Indian Contract Act, 1872
also have a bearing on these securities’ contracts as this is a general Act which governs
the rights of parties in a contract and the effects thereof. Following are some important
terms/definitions used in the Indian Contract Act:
(i) Contract: According to section 2(h) of the Indian Contract Act, 1872, a contract is an
agreement enforceable by law. Therefore, there has to be an agreement to create a
contract and secondly, it has to satisfy certain requirements mentioned in section 10 of
the Act, i.e., the agreement has to be between parties competent to contract, with their
free consent, for a lawful object and with lawful consideration, and it should not have
been expressly declared as void agreement. Standard Form Contracts: With an
enormous increase in commercial transactions, the concept of Standard Form Contracts
has come into existence.
(ii) Agency Contract: An agent is a person employed to do any act for another or to
represent another in dealings with third persons, as per section 182 of the Indian
Contract Act, 1872.
(iii) Sub-agent: A sub-agent is a person employed by, and acting under the control of,
the original agent in the business of the agency. Though the general rule is against
delegation of authority by an agent or the appointment of a sub-agent, there could be
such an appointment in exceptional situations recognized by law.
14. What are the popular tools to understand the financial statements? Give brief
of each?
3 Ans. Accounting is a system of collecting, summarizing, analyzing and reporting in
monetary terms, financial status of an organization. The end product of the financial
accounting is the financial statements consisting of Balance Sheet and Profit & Loss
Account.As the name suggests, balance sheet provides information about financial
position of a firm at a particular point of time. On the other hand, Profit & Loss Account
of a firm portrays as a flow statement, the results of operations over a specified period
of time (usually accounting year, April-March). The Balance Sheet contains information
pertaining to firm’s assets, liabilities and shareholders’ equity whereas Profit & Loss
Account summarizes the revenue items, the expense items and the difference between
the two (net income) for an accounting period The popular tools are
a) Comparative Financial Statements,
b) Common sized Statements, and
c) Ratio Analysis
15. Explain the procedure of surrender of Trading Memberships?
Ans. NSE provides a scheme for enabling the trading member to surrender their
membership to the Exchange. Details of the norms and procedures related to the
surrender of membership to the Exchange are prescribed as below: a) A trading
member desirous of surrendering its membership of the Exchange is required to send
its request in writing in the prescribed format. b) Before submission of an application for
surrender of membership, the trading member is required to comply with all the pre-
requisites for application of surrender in the prescribed format. The following aspects
should be covered in the application for surrender of membership from a trading
member,
(i) Who has been suspended/ disciplinary action taken by the Exchange /SEBI (ii) In
respect of whom any investigation/ action consequent to a default has been initiated by
the Exchange /SEBI, The Exchange has absolute discretion in dealing with such
applications and if it decides to process/accept the surrender application of such trading
member, it may impose additional terms and conditions as it may deem fit. c) No trading
member, who has surrendered its trading membership, their partners (in case of
partnership firm) and/ or dominant shareholders (in case of corporates) is eligible to be
re-admitted to the trading membership of the Exchange in any form for a period of one
year from the date of cessation of trading membership (i.e. from the date of approval of
surrender). d) The application of surrender of trading membership is subject to
fulfillment of certain conditions, such as submission of original SEBI registration
certificate(s) on all segments on which the trading member is registered; submission of
sub-broker registration certificate(s) of all the sub-brokers associated with the trading
member for onward transmission to the SEBI for cancellation etc. e) The trading
member should request the Exchange through their surrender application to dismantle
and recover all the leased line(s)/ VSAT(s) and other equipments given to them at their
dealing offices.
16.Write the Computational methodology for Construction of Stock indices? How
CNX Nifty Calculate?
Ans: The computational methodology followed for construction of stock market indices
are
1. Free Float Market Capitalization Weighted Index,
2. Market Capitalization Weighted index and the
3. Price Weighted Index
The Free float market capitalization is calculated in the following manner: Free Float
Market Capitalisation = Issue Size * Price * Investible Weight Factor The Index in this
case is calculated as per the formulae given below: Index = Free float current market
capitalization *Base Value Free Float Base Market Capitalization. The India Index
Services Limited (IISL), aa subsidiary of NSE Strategic Investment Corporation Limited,
introduced the free float market capitalization methodology.
17. Explain MTM Margin?
Ans: The mark to market margin (MTM) is collected from the member before the start of
the trading of the next day. The MTM margin is collected/adjusted from/against the
cash/cash equivalent component of the liquid net worth deposited with the
Exchange.Mark to market loss is calculated by marking each transaction in security to
the closing price of the security at the end of trading.
18.What is Contract Note? Write the information detail mentioned on the contract
Note?
Ans:
1. Contract note is a confirmation of trade(s) done on a particular day for and on behalf
of a client.
2. The contract note should contain name and address (registered office address as
well as dealing office address) of the TM, the SEBI registration number of the TM,
3. Details of trade viz. order number, trade number, order time, trade time, security
name, quantity, trade price, brokerage, settlement number and details of other levies.
19.Under What condition the relevant authority suspend the business of trading
member?
Ans: (a)Prejudicial business: When the relevant authority finds that the trading
member conducts business in a manner prejudicial to the Exchange by making
purchases or sales of securities or offers to purchase or sell securities for the purpose
of upsetting equilibrium of the market or bringing about a condition of demoralization in
which prices will not fairly reflect market values, or (b) Unwarrantable business: When
in the opinion of the relevant authority the trading member engages in unwarrantable
business or effects purchases or sales for its constituent‘s account or for any account
(c) Unsatisfactory financial condition: When the relevant authority finds that the
trading member is in a bad financial condition and it cannot be permitted to do business
with safety to its creditors or the Exchange.
20. Write the admission procedure of new memberships?
Ans. 1. Applicants are required to submit application form, in the prescribed format
along with other relevant documents to the Exchange. The application for new
membership is then forwarded to Membership Recommendation Committee. The
Membership Recommendation Committee (MRC) consists of seven persons from
various disciplines. The MRC conducts interviews of the applicants for trading
membership. In case of corporate, the dominant shareholder and designated directors;
in case of individuals, the individual himself and in case of partnership firms – two
designated partners have to appear for the interview. The purpose of the interview is to
acquire information about their capability & commitment to carry on stock broking
activities, financial standing and integrity. 2. . The MRC recommends the names for
admission of trading members to the Membership Approval Committee (Sub-committee
of board of directors)/Board of directors of the Exchange. The Board of Directors after
taking into consideration the recommendations of the MRC either approves or rejects
the applications. 3. On getting approval from the Board, an admission on a provisional
basis is provided to the applicant subject to certain conditions like registration with
SEBI, submission of relevant fees/ deposits and documents. The documents of the
member are then forwarded to SEBI for registration. 4. After satisfying itself as to
compliance with respect to all the prescribed norms, SEBI grants a Registration
Certificate in the name of the applicant. 5. The dealers on CM segment are required to
clear the Capital Market (Dealers) Module of NCFM; dealers on Futures & Options
Segment are required to clear the Derivatives Market (Dealers) Module or equivalent
examination of NCFM.
21. Explain NEAT?
Ans. NEAT Screen The trader workstation screen of the trading member is divided into
the following windows:
(i) Title bar: It displays trading system name i.e. NEAT, the trading member name the
user id, user type, the date and the current time.
(ii) Ticker Window: The ticker window displays securities capital market segments. The
ticker selection facility is confined to the securities of capital market segment only. The
first ticker window, by default, displays all the derivatives contracts traded in the Futures
and Options segment.
(ii) Tool Bar: The toolbar has functional buttons which can be used with the mouse for
quick access to various functions such as Buy Order Entry, Sell Order Entry, Market By
Price (MBP), Previous Trades (PT), Outstanding Order (OO), Activity Log (AL), Order
Status (OS), Market Watch (MW), Snap Quote (SQ), Market Movement (MM), Market
Inquiry (MI), Auction Inquiry (AI), Order Modification (OM), Order Cancellation (OCXL),
Security List, Net Position, Online Backup, Supplementary Menu, Index Inquiry, Index
Broadcast and Help. All these functions are also accessible through the keyboard.
(iii) Market Watch Window: The ‘Market Watch’ window is the main area of focus for a
trading member. This screen allows continuous monitoring of the securities that are of
specific interest to the user. It displays trading information for the selected securities.
(iv) Inquiry Window: This screen enables the user to view information such as Market
by Order (MBO), Market by Price (MBP), Previous Trades (PT), Outstanding Orders
(OO), Activity Log (AL), Order Status (OS), Market Movement (MM), Market Inquiry
(MI), Net Position, Online Backup, Index Inquiry, Indices Broadcast, Most Active
Securities and so on. Relevant information for the selected security can be viewed.
(v) Message Window: This enables the user to view messages broadcast by the
exchange such as corporate actions, any market news, auctions related information etc.
and other messages like order confirmation, order modification, order cancellation,
orders which have resulted in quantity freezes/price freezes and the exchange action on
them, trade confirmation, trade cancellation/modification requests and exchange action
on them, name and time when the user logs in/logs off from the system, messages
specific to the trading member, etc. These messages appear as and when the event
takes place in a chronological order.
22. Explain Trade workstation of the Member (Market Watch window)?
Ans. Market Watch The Market Watch window is the third window from the top of the
screen that is always visible to the user. The Market Watch is the focal area for users.
The purpose of Market Watch is to setup and view trading details of securities that are
of interest to users. For each security in the Market Watch, market information is
dynamically updated. Following are the key features of Market Watch Screen: (i)
Market Information Displayed: The one line market information displayed in the
market watch screen is for current best price orders available in the Regular Lot book.
For each security the following information is displayed: a) The corporate action
indicator “Ex/Cum” b) The total buy order quantity available at best buy price c) Best
buy price d) Best sell price e) Total sell order quantity available at best sell price f) The
last traded price g) The last trade price change indicator and h) The no delivery period
indicator “ND” i) The Percentage change from previous day’s closing price’ (ii)
Information Update: In the Market Watch screen, changes in the best price and
quantities are highlighted on a dynamic basis (in all pages of Market Watch). For
example, if the best price changes as a result of a new order in the market, the new
details are immediately displayed If the last traded price is higher than the previous last
traded price then the indicator ‘+’ appears or if the last traded price is lower than the
previous last traded price then the indicator ‘-’ appears. If there is no change in the last
traded price, no indicator is displayed.
(iv) Market Watch Download: A user has to set up securities after the first download of
the software. After setting up the market watch, it is suggested that the user should log
out normally. This will help the user to save the freshly set up market watch securities in
a file. If at any given time, when the user has freshly set up a few securities and
encounters an abnormal exit, the newly set up securities are not saved and the user
may have to repeat the process of setting up securities. The Market Watch setup is
carried over to subsequent days, thus averting the need to set up the Market Watch on
daily basis.
(iv) Setting up Securities: One of the best features of this software is that the user has
the facility to set up 500 securities in the market watch. The user can view up to 30
securities in one page of the market watch screen. (vi) Corporate Actions Indication:
An indicator for corporate actions for a security is another feature in market watch. The
indicators are as follows: ‘XD’ - ex-dividend ‘XB’ - ex-bonus ‘XI’ - ex-interest ‘XR’ - ex-
rights ‘CD’ - cum-dividend ‘CR’ - cum-rights ‘CB’ - cum-bonus ‘CI’ - cum-interest ‘C*’ - in
case of more than one of CD, CR, CB, CI ‘X*’ - in case of more than one of XD, XR, XB,
XI
23. Explain different phases of the Regular Market?
Ans. Market Phases The trading system is normally made available for trading on all
days except Saturdays, Sundays and other holidays. Holidays are declared by the
Exchange from time to time. A trading day typically consists of a number of discrete
stages as below:
1. Opening: The trading member can carry out the following activities after login to the
NEAT system and before the market opens for trading:
a) Set up Market Watch (the securities which the user would like to view on the screen)
b) View Inquiry screens
2. Pre-open: The pre-open session is for duration of 15 minutes i.e. from 9:00 am to
9:15 am. The pre-open session is comprised of Order collection period and order
matching period. The order collection period of 8* minutes shall be provided for order
entry,
modification and cancellation. (* - System driven random closure between 7th and 8th
minute).
3. Normal Market Open Phase: The open period indicates the commencement of
trading activity. To signify the start of trading, a message is sent to all the trader
workstations. Trading in all the instruments is allowed unless they are specifically
prohibited by the Exchange. The activities that are allowed at this stage are Inquiry,
Order Entry, Order Modification, Order Cancellation (including quick order cancellation),
Order Matching and Trade Cancellation.
4. Market Close: When the market closes, trading in all instruments for that market
comes to an end. A message to this effect is sent to all trading members. No further
orders are accepted, but the user is permitted to perform activities like inquiries and
trade cancellation.Post-Close Market: This closing session is available only in Normal
Market Segment. Its timings are from 3.40 PM to 4.00 PM. Only market price orders are
allowed. Special Terms, Stop Loss and Disclosed Quantity Orders, Index Orders are not
allowed.
5. SURCON: Surveillance and Control (SURCON) is that period after market close
during which, the users have inquiry access only. After the end of SURCON period, the
system processes the data for making the system available for the next trading day.
When the system starts processing data, the interactive connection with the NEAT
system is lost and the message to that effect is displayed at the trader workstation.
24. Explain the Risk in Settlements of Day to Day Trading?
Ans. Risks in Settlement The following two kinds of risks are inherent in a settlement
system: (i) Counterparty Risk: This arises if parties do not discharge their obligations
fully when due or at any time thereafter. This has two components, namely replacement
cost risk prior to settlement and principal risk during settlement. a) The replacement
cost risk arises from the failure of one of the parties to transaction. While the non-
defaulting party tries to replace the original transaction at current prices, he loses the
profit that has accrued on the transaction between the date of original transaction and
date of replacement transaction. The seller/ buyer of the security lose this unrealized
profit if the current price is below/ above the transaction price. Both parties encounter
this risk as prices are uncertain. It has been reduced by reducing time gap between
transaction and settlement and by legally binding netting systems. b) The principal risk
arises if a party discharges his obligations but the counterparty defaults. The
seller/buyer of the security suffers this risk when he delivers/ makes payment, but does
not receive payment/delivery. This risk can be eliminated by delivery vs. payment
mechanism which ensures delivery only against payment. This has been reduced by
having a central counterparty (NSCCL) which becomes the buyer to every seller and the
seller to every buyer. A variant of counterparty risk is liquidity risk which arises if one of
the parties to transaction does not settle on the settlement date, but later. The
seller/buyer who does not receive payment/delivery when due, may have to borrow
funds/securities to complete his payment/delivery obligations. Another variant is the
third party risk which arises if the parties to trade are permitted or required to use the
services of a third party which fails to perform. For example, the failure of a clearing
bank which helps in payment can disrupt settlement. This risk is reduced by allowing
parties to have accounts with multiple banks. Similarly, the users of custodial services
face risk if the concerned custodian becomes insolvent, acts negligently, etc. (ii)
System Risk: This comprises of operational, legal and systemic risks. The operational
risk arises from possible operational failures such as errors, fraud, outages etc. The
legal risk arises if the laws or regulations do not support enforcement of settlement
obligations or are uncertain. Systemic risk arises when failure of one of the parties to
discharge his obligations leads to failure by other parties. The domino effect of
successive failures can cause a failure of the settlement system. These risks have been
contained by enforcement of an elaborate margining and capital adequacy standards to
secure market integrity, settlement guarantee funds to provide Counter-party guarantee,
legal backing for settlement activities and business continuity plan, etc.
25. Explain All Daily Margin Payments?
Ans. Daily margins payable by the trading members in the Cash market consists of the
following: (i) Value at Risk (VaR) margin (ii) Mark to Market Margin (iii) Extreme
Loss Margin The margins are computed at client level. A member entering an order,
needs to enter the client code. Based on this information, margin is computed at the
client level, which will be payable by the trading members on upfront basis. Let us see
in details what is meant by these margins. Value at Risk Margin VaR is a single
number, which encapsulates whole information about the risk in a portfolio. It measures
potential loss from an unlikely adverse event in a normal market environment. It
involves using historical data on market prices and rates, the current portfolio positions,
and models (e.g., option models, bond models) for pricing those positions. These inputs
are then combined in different ways, depending on the method, to derive an estimate of
a particular percentile of the loss distribution, typically the 99th percentile loss.
Computation of VaR Margin VaR Margin is a margin intended to cover the largest loss
that can be encountered on 99% of the days (99% Value at Risk). For liquid securities,
the margin covers one-day losses while for illiquid securities; it covers three-day losses
so as to allow the clearing corporation to liquidate the position over three days. This
leads to a scaling factor of square root of three for illiquid securities. For liquid
securities, the VaR margins are based only on the volatility of the security while for
other securities, the volatility of the market index is also used in the computation: Some
Definitions: Computation of the VaR margin requires the following definitions:
a) Security sigma: It means the volatility of the security computed as at the end of the
previous trading day. The computation uses the exponentially weighted moving average
method applied to daily returns in the same manner as in the derivatives market.
b) Security VaR: It means the higher of 7.5% or 3.5 security sigmas.
c) Index sigma: It means the daily volatility of the market index (CNX Nifty or BSE
Sensex) computed as at the end of the previous trading day. The computation uses the
exponentially weighted moving average method applied to daily returns in the same
manner as in the derivatives market.
d) Index VaR: It means the higher of 5% or 3 index sigmas. The higher of the Sensex
VaR or Nifty VaR would be used for this purpose.
Collection of VaR Margin The VaR margin is collected on an upfront basis by
adjusting against the total liquid assets of the member at the time of trade. The VaR
margin is collected on the gross open position of the member. The gross open position
for this purpose would mean the gross of all net positions across all the clients of a
member including its proprietary position. For this purpose, there would be no netting of
positions across different settlements. MARK-TO-MARKET MARGIN Mark to market
loss is calculated by marking each transaction in security to the closing price of the
security at the end of trading.. In case the net outstanding position in any security is nil,
the difference between the buy and sell values is considered as notional loss for the
purpose of calculating the mark to market margin payable. The mark to market margin
(MTM) is collected from the member before the start of the trading of the next day. The
MTM margin is collected/adjusted from/against the cash/cash equivalent component of
the liquid net worth deposited with the Exchange. The MTM margin is collected on the
gross open position of the member. The gross open position means the gross of all net
positions across all the clients of a member including its proprietary position. Trade
Segment (TFT segment) each trade is marked to market based on the closing price of
that security. The MTM margin so collected is released on completion of pay-in of the
settlement.
EXTREME LOSS MARGIN The Extreme Loss Margin for any security is higher of: a)
5%, or b) 1.5 times the standard deviation of daily logarithmic returns of the security
price in the last six months. This computation is done at the end of each month by
taking the price data on a rolling basis for the past six months and the resulting value is
applicable for the next month.
26. Explain The Depositary Act.1996 in Detail?
Ans: The paper based ownership and transfer of securities was a major drawback of
the Indian securities markets since it often resulted in delay in settlement and transfer of
securities, leading to bad delivery‘, theft, forgery etc. The rapid growth in number and
volume of transactions in the securities markets further highlighted the limitations of
handling securities in the physical/ paper mode. As a result, in line with the
developments in the securities industry worldwide the paper based settlement and
clearing system was replaced with depository system or scrip less trading system. This
transition was facilitated by the Depositories Act, 1996.
Objectives (a) Making securities of public limited companies freely transferable subject
to certain exceptions; (b) Dematerializing the securities in the depository mode. (c)
Providing for maintenance of ownership records in a book entry form. In order to
streamline the settlement process, the Act envisages transfer of ownership of securities
electronically by book entry without making the securities move from person to person.
The terms used in the Act are defined as under:
(a) Beneficial owner means a person whose name is recorded as such with a
depository.
(b) Depository means a company, formed and registered under the Companies Act,
2013 and which has been granted a certificate of registration under sub-section (1A) of
section 12 of the SEBI Act, 1992.
(c) Issuer means any person making an issue of securities.
(d) Participant means a person registered as such under sub-section (1A) of section 12
of the SEBI Act, 1992.
27. Explain VaR Margin in Detail?
Ans: Value at Risk Margin VaR is a single number, which encapsulates whole
information about the risk in a portfolio. It measures potential loss from an unlikely
adverse event in a normal market environment.(1) Computation of VaR Margin: VaR
Margin is a margin intended to cover the largest loss that can be encountered on 99%
of the days (99% Value at Risk). For liquid securities, the margin covers one-day losses
while for illiquid securities; it covers three-day losses so as to allow the clearing
corporation to liquidate the position over three days.Some Definitions: Computation
of the VaR margin requires the following definitions:
(a) Security sigma: It means the volatility of the security computed as at the end of the
previous trading day. The computation uses the exponentially weighted moving average
method applied to daily returns in the same manner as in the derivatives market.
(b) Security VaR: It means the highest of 7.5% or 3.5 security Sigmas.
(c) Index sigma: It means the daily volatility of the market index (CNX Nifty or BSE
Sensex) computed as at the end of the previous trading day. The computation uses the
exponentially weighted moving average method applied to daily returns in the same
manner as in the derivatives market.
(d) Index VaR: It means the higher of 5% or 3 index Sigmas. The higher of the Sensex
VaR or Nifty VaR would be used for this purpose.
The VaR margin rate computed, as mentioned above, will be charged on the net
outstanding position (buy value-sell) of the respective clients on the respective
securities across all open settlements. There would be no netting off of positions across
different settlements.
Collection of VaR Margin: The VaR margin is collected on an upfront basis by
adjusting against the total liquid assets of the member at the time of trade. The VaR
margin is collected on the gross open position of the member.
28. Write the Purpose of Following Windows of NEAT Trading System:
a. Market byPrice (F6): The purpose of Market by Price (MBP) is to enable the user to
view outstanding orders in the market aggregated at each price and are displayed in
order of best prices.
b. Previous Trade (F8): The purpose of the Previous Trades window is to provide
security-wise information to users for own trades. Trade cancellation can be requested
from the Previous Trade screen.
c. Activity Log (F7):The Activity Log (AL) shows all the activities that have been
performed on any order belonging to that user. These activities include order
modification/cancellation, partial/full trade, and trade modification/cancellation.
d. Snap Quote (F9):Snap Quote: The snap quote feature allows a trading member to
get instantaneous market information on any desired security. This is normally used for
securities that are not already set in the Market Watch window. The information
presented is the same as that of the Marker Watch window.
e. OutstandingOrder (F3):The purpose of Outstanding Orders is to enable the user to
view the outstanding orders for a security. An outstanding order is an order that has
been entered by the user, but which has not yet been completely traded or cancelled.
The user is permitted to see his orders.
29. Explain daily Market Trading Phases?
Ans:A trading day typically consists of a number of discrete stages as below: (i)
Opening: The trading member can carry out the following activities after login to the
NEAT system and before the market opens for trading: (a) Set up Market Watch (the
securities which the user would like to view on the screen) (ii) Pre-open: The pre-open
session is for a duration of 15 minutes i.e. from 9:00 am to 9:15 am. The pre-open
session is comprised of Order collection period and order matching period. The order
collection period of 8* minutes shall be provided for order entry, modification and
cancellation. (* - System driven random closure between 7th and 8th minute). During
this period orders can be entered, modified and cancelled. (iii) Normal Market Open
Phase: The open period indicates the commencement of trading activity. To signify the
start of trading, a message is sent to all the trader workstations. The market open time
for different markets is notified by the Exchange to all the trading members. Order entry
is allowed when all the securities have been opened. During this phase, orders are
matched on a continuous basis. Trading in all the instruments is allowed unless they are
specifically prohibited by the Exchange. The activities that are allowed at this stage are
Inquiry, Order Entry, Order Modification, Order Cancellation (including quick order
cancellation), Order Matching and Trade Cancellation. (iv) (a)Market Close: When the
market closes, trading in all instruments for that market comes to an end. A message to
this effect is sent to all trading members. No further orders are accepted, but the user is
permitted to perform activities like inquiries and trade cancellation. (b)Post-Close
Market: This closing session is available only in Normal Market Segment. Its timings
are from 3.40 PM to 4.00 PM. Only market price orders are allowed. Special Terms,
Stop Loss and Disclosed Quantity Orders, Index Orders are not allowed. The trades are
considered as Normal Market trades. Securities not traded in the normal market session
are not allowed to participate in the Closing Session. (v) Surcon: Surveillance and
Control (SURCON) is that period after market close during which, the users have
inquiry access only. After the end of SURCON period, the system processes the data
for making the system available for the next trading day. When the system starts
processing data, the interactive connection with the NEAT system is lost and the
message to that effect is displayed at the trader workstation.
30. Explain Surrender of Trading Membership?
Ans:Surrender of trading membership can be permitted by the Exchange after fulfilling
certain conditions by the member such as, clearing off all the dues to the Exchange and
NSCCL, notifying all other TMs of the approval of surrender, issuance of a public
notification in leading dailies, etc. (a) A trading member desirous of surrendering its
membership of the Exchange is required to send its request in writing in the prescribed
format. (b) Before submission of an application for surrender of membership, the
trading member is required to comply with all the pre-requisites for application of
surrender in the prescribed format. The following aspects should be covered in the
application for surrender of membership from a trading member, (i) who has been
suspended/ disciplinary action taken by the Exchange /SEBI (ii) in respect of whom any
investigation/ action consequent to a default has been initiated by the Exchange /SEBI.
(c) No trading member, who has surrendered its trading membership, their partners (in
case of partnership firm) and/ or dominant shareholders (in case of corporates) is
eligible to be re-admitted to the trading membership of the Exchange in any form for a
period of one year from the date of cessation of trading membership.
(d)The application of surrender of trading membership is subject to fulfillment of certain
conditions, such as submission of original SEBI registration certificate(s) on all
segments on which the trading member is registered; submission of sub-broker
registration certificate(s) of all
the sub-brokers associated with the trading member for onward transmission to the
SEBI for cancellation etc. (e)A notice to public by way of a public notification in
newspapers should be made by the Exchange and certain time (from the date of public
notification) is given to investors, public, etc. to lodge claims against the surrendering
trading member.
31. Describe the Application “Overpriced Future, Buy Spot, and Sell Future’.
Ans: If you notice that futures on a security that you have been observing seem
overpriced, how can you cash in on this opportunity to earn riskless profits? Say for
instance, ABC Ltd. trades at Rs.1000. One-month ABC futures trade at Rs.1025 and
seem overpriced. As an arbitrageur, you can make riskless profit by entering into the
following set of transactions. 1. On day one, borrow funds; buy the security on the
cash/spot market at 1000. 2. Simultaneously, sell the futures on the security at 1025. 3.
Take delivery of the security purchased and hold the security for a month. 4. On the
futures expiration date, the spot and the futures price converge. Now unwind the
position. 5. Say the security closes at Rs.1015. Sell the security. 6. Futures position
expires with profit of Rs. 10. 7. The result is a riskless profit of Rs.15 on the spot
position and Rs.10 on the futures position. 8. Return the borrowed funds. (1 ½ )
32. If you bought 100 Fortis @ 3000 on 18Dec. 2015and worry about the market
fall, which strategy you will use to minimize the risk of downfall of the market and
what would be your P/L position if Fortis future on 18 Dec. was 3100 and at the
expiry settlement price of Fortis is 2800?
Ans: Bought 100 Fortis @3000= Rs. 3, 00,000 Fortis future contact value= Rs. 3,10,000
Fortis spot price at the maturity= Rs. 2800 If you were start the Fortis future by Hedging
Position your P/L position will be Profit in future (3100-2800)= 300 each Fortis(1) Loss
position in spot (3000-2800) = 200 each in Fortis(1) Overall profit position (300-200) 
lot 100  100= Rs. 10,000
33. Write the Price sensitive information under SEBI (Prohibition of Insider Trading)
Regulations, 2015?
Answer: Price sensitive information means any information which is related directly or
indirectly to a company and which if published is likely to materially affect the price of
securities of a company.
(a) periodical financial results of the company.
(b) intended declaration of dividends (both interim and final).
34. Describe International Securities Identification Number.
Answer: Numbering System of ISIN: The numbering structure for securities in
NSDL is of 12 digit alpha numeric string. The first two characters represent
country code i.e. IN (in accordance with ISO 3166).
The third character represents the Issuer Type.
The list may be expanded as per need. Maximum issuer types can be 35 (A to Z
and 0 to 8. The partly paid up shares are identified by 9). The next 4 characters
(fourth to seventh character) represent company identity of which first 3
characters are numeric and fourth character is alpha character.
The next two characters (the eight and ninth characters) represent security type
for a given issuer. Both the characters are numeric. The next two characters (the
tenth and eleventh characters) are serially issued for each security of the issuer
entering the system. Last digit is check digit.
35. Describe International Securities Identification Number.
Answer: Numbering System of ISIN: The numbering structure for securities in
NSDL is of 12 digit alpha numeric string. The first two characters represent
country code i.e. IN (in accordance with ISO 3166).
The third character represents the Issuer Type.
The list may be expanded as per need. Maximum issuer types can be 35 (A to Z
and 0 to 8. The partly paid up shares are identified by 9). The next 4 characters
(fourth to seventh character) represent company identity of which first 3
characters are numeric and fourth character is alpha character.
The next two characters (the eight and ninth characters) represent security type
for a given issuer. Both the characters are numeric. The next two characters (the
tenth and eleventh characters) are serially issued for each security of the issuer
entering the system. Last digit is check digit.
36. What is index Derivatives contract? Write its advantages.
Answer: Index derivatives are derivative contracts which have the index as the underlying.
The most popular index derivative contracts the world over are index futures and index
options.
Index derivatives offer ease of use for hedging any portfolio irrespective of its composition.
Stock index, being an average, is much less volatile than individual stock prices. This
implies much lower capital adequacy and margin requirements.
37.Define In- the-Money, At-the-Money and Out-of-the-Money Option Contracts.
Answer:
An in-the-money (ITM) option would lead to a positive cash flow to the holder if it were
exercised immediately. A call option on the index is said to be inthe-money when the
current index stands at a level higher than the strike price (i.e. spot price > strike price).
An at-the-money (ATM) option would lead to zero cash flow if it were exercised
immediately. An option on the index is at-the-money when the current index equals the
strike price (i.e. spot price = strike price).
An out-of-the-money (OTM) option would lead to a negative cash flow if it were exercised
immediately. A call option on the index is out-of-the-money when the current index stands
at a level which is less than the strike price (i.e. spot price < strike price).
38. Several entities involved in the process of clearing and settling the trades
executed on Exchanges. Write the role of each agency.
Clearing Corporation (NSCCL): The NSCCL is responsible for post-trade activities of a
stock exchange. Clearing and settlement of trades and risk management are its central
functions.
Clearing Members: They are responsible for settling their obligations as determined by the
NSCCL. They have to make available funds and/or securities in the designated accounts
with clearing bank/depository participant, as the case may be, to meet their obligations on
the settlement day.
Custodians: A custodian is an entity who is responsible for safeguarding the documentary
evidence of the title to property like share certificates, etc. In NSCCL, custodian is a
clearing member but not a trading member.
Clearing Banks: Clearing banks are a key link between the clearing members and NSCCL
for funds settlement. Every clearing member is required to open a dedicated settlement
account with one of the clearing banks. Based on his obligation as determined through
clearing, the clearing member makes funds available in the clearing account for the pay-in
and receives funds in case of a pay-out.
39. Index reflects the whole market. Explain various computational methodologies
to construct the indices.
Answer:
A good index is a trade-off between diversification and liquidity.
The computational methodology followed for construction of stock market
indices are
Free Float Market Capitalization Weighted Index,
Market Capitalization Weighted index and the
Price Weighted Index.
Free Float Market Capitalisation Weighted index: The free float factor (Investible Weight
Factor), for each company in the index is determined based on the public shareholding of
the companies as disclosed in the shareholding pattern submitted to the stock exchange
by these companies
The Free float market capitalization is calculated in the following manner: Free Float
Market Capitalisation = Issue Size * Price * Investible Weight Factor The Index in this case
is calculated as per the formulae given below:
Market Capitalisation Weighted index: In this type of index calculation, each stock in the
index affects the index value in proportion to the market value of all shares outstanding. In
this the index would be calculated as per the formulae below:
Price Weighted index: In a price weighted index each stock influences the index in
proportion to its price per share. The value of the index is generated by adding the prices
of each of the stocks in the index and dividing then by the total number of stocks.
40. Future contract in the derivative market measure the final position at the expiry.
Describe the Payoff position of Buyer and Seller of the Future contract. Explain
Diagrammatically.
Answer:
Payoff means the returns from either buying or selling a futures contract as against buying
or selling the underlying asset. Payoff is positive if the position held brings profits to the
holder, the payoff is negative if the position held brings losses to the holder. Futures
contracts have linear or symmetrical payoffs.
Payoff for buyer of futures: Long futures
The above shows the profits/losses for a long futures position. The investor bought futures
when the index was at 6000. If the index goes up, his futures position starts making profit.
If the index falls, his futures position starts showing losses.
41.Payoff for seller of futures: Short futures
The shows the profits/losses for a short futures position. The investor sold futures when
the index was at 6000. If the index goes down, his futures position starts making
profit. If the index rises, his futures position starts showing losses.
42. Explain the conditions under which the relevant authority may require a trading
member to suspend its business in part or in whole?
1. Prejudicial business: making purchases or sales of securities or offers to purchase or
sell securities for the purpose of upsetting equilibrium of the market.
2. unwarrantable business effects purchases or sales for its constituent‘s account or for
any account in which it is directly or indirectly interested in view of its constituent‘s or its
own means and financial resources
3. Unsatisfactory financial condition: When the relevant authority finds that the trading
member is in a bad financial condition.
43. When does order matching period start? Give the order matching the sequence
in the pre-open market?
Order matching period starts immediately after completion of order collection period.
Orders are matched at a single (equilibrium) price which will be open price. The order
matching happens in the following sequence:
•Eligible limit orders are matched with eligible limit orders
•Residual eligible limit orders are matched with market orders
•Market orders are matched with market orders
44. The trading members are required to provide liquid assets which adequately
cover various margins & minimum capital requirements under capital adequacy
requirement. Describe its liquid asset requirement.
Liquid (Group I) Equity Shares in demat form. Haircuts applied are equivalent to the VaR
margin for the respective securities.
Mutual fund units Haircut equivalent to the VaR margin for the units computed using the
traded price
Corporate bonds in demat form as decided by NSCCL from time to time with haircuts as
specified by NSCCL.
45. Explain the various categories of membership with NSE and NSCCL.
I. Trading Member: This category of membership entitles a member to execute trades on
his own account as well as on account of his clients.
II. Trading cum self-clearing member: This category of membership entitles a member to
execute trades and to clear and settle the trades executed on his own account as well as
on account of his clients.
III. Trading cum clearing member: This category of membership entitles a member to
execute trades on his own account as well as on account of his clients and to clear and
settle trades executed by themselves as well as by other trading members
IV. Professional Clearing member: This category of membership entitles a member to
clear and settle trades of such members of the Exchange who choose to clear and settle
their trades through this member.

46. Describe the various advantages of the Screen-Based Trading System (SBTS)?
• It electronically matches orders on a strict price/time priority.
• It allows faster incorporation of price sensitive information into prevailing prices, thus
increasing the informational efficiency of markets.
• It enables market participants, irrespective of their geographical locations, to trade with
one another simultaneously, improving the depth and liquidity of the market.
• It provides full anonymity by accepting orders, big or small, from members without
revealing their identity, thus providing equal access to everybody.
47.Explain VaR Margin.
VaR is a single number, which encapsulates whole information about the risk in a
portfolio. It measures potential loss from an unlikely adverse event in a normal market
environment. Computation of the VAR margin requires four definitions. Explain them.
Security sigma: It means the volatility of the security computed as at the end of the
previous trading day. The computation uses the exponentially weighted moving average
method applied to daily.
Security VaR: It means the highest of 7.5% or 3.5 security sigma.
Index sigma: It means the daily volatility of the market index computed as at the end of
the previous trading day. The computation uses the exponentially weighted moving
average method applied to daily returns.
Index VaR: It means the higher of 5% or 3 index sigma. The higher of the Sensex
VaR or Nifty VaR would be used for this purpose.