1.0 Objective. 2.0 Background 1/7

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1 Proposed amendment in Securities and Exchange Board of India(Stock- Brokers and Sub-Brokers) Regulations, 1992 for the purpose of introducing debt segment on stock exchanges. 1.0 Objective This memorandum seeks to propose certain amendments to Securities and Exchange Board of India (Stock-Brokers and Sub-Brokers) Regulations, 1992 (hereinafter referred as Broker Regulations) thereby incorporating provisions relating to registration of trading member and/or clearing member of the proposed debt segment. The debt segment is proposed to be introduced as new segment in addition to existing cash(equity) segment, derivatives segment and currency derivatives segment. 2.0 Background 2.1. The need to develop the corporate bond market was emphasized by the Finance Minister in the recent FSDC meeting on November 10,2012. A vibrant corporate bond market is critical to the economy as it allocates resources efficiently and helps provides an alternate to bank financing and reduces dependence on foreign borrowings The important suggestions on developing market infrastructure for corporate bond market made in various committee reports, meetings and fora, which also pertained to SEBI includea) introducing /expanding trading platforms (order matching system) b) enabling centralised database for corporate bonds c) setting up of Central Counter Party and Central trade Guarantee Fund for trading of corporate bonds at exchanges. d) introducing DVPIII mechanism for bonds to enable settlement on net cash basis. e) allowing trading of collateralised Corporate Bond Receipts (CCRBs) on stock exchanges f) introducing market making schemes for providing two way quotes 1/7

2 g) encouraging consolidation of corporate bonds to create larger outstanding volumes and also encouraging reissuance of debentures. h) mandating unified conventions for standardizations i) stipulating risk management framework for corporate bonds listed and traded in cash segment With an objective to develop corporate bond market, RBI vide circular dated November 5,2012 permitted Scheduled Commercial Banks (SCBs) to become members of SEBI approved stock exchanges for the purpose of undertaking proprietary transactions in the corporate bond market. The SCBs have to satisfy the membership criteria of the stock exchanges and also comply with the regulatory norms laid down by SEBI and the respective stock exchanges to become members of the approved stock exchanges. 3.0 Need for separate Debt segment 3.1 The market for debt securities differs from equity markets in several ways such as risk, returns, liquidity, type of participants and method of trading. While the equity markets in India offer trading infrastructure comparable to the best globally, the debt markets lack such infrastructure. In order to facilitate creation of trading platforms which cater to the unique characteristics of debt markets, it has been proposed to have a separate debt segment on exchanges in addition to the existing cash segment, derivatives segment and currency derivatives segment. This new debt segment shall provide for trading, reporting, membership, clearing & settlement rules (including risk management framework)and other necessary provisions. The trading platform would be constructed on lines existing for trading of G-Secs viz NDS-OM/ NDS under the aegis of RBI. 3.2 The debt segment shall have retail and institutional market wherein the former would be a market for listing of and trading in publicly-issued debt securities and latter would be a market for non-publicly-issued debt securities with market feature as may be decided by SEBI from time to time. 3.3 Presently, a trading member desirous of trading in debt instruments on his own account or on account of client can do so by obtaining trading member/stock broker membership of cash segment. There is no separate 2/7

3 membership requirement for trading in debt instruments. In light of trading approval given by RBI permitting SCBs to trade on their own account, it is proposed to introduce a separate debt segment and therefore it is necessary to amend Broker Regulations to provide for the following Any entity desirous of becoming trading member and/or self clearing /clearing member of debt segment has to seek registration under Broker Regulations Till debt segment membership under SEBI (Stock Broker and Sub- Broker) Regulations is obtained, in the interim enabling provisions may provide for - a) An existing registered trading member: any existing registered trading member in derivative segment or currency derivatives segment is permitted to trade in institutional market of debt segment; and existing registered stock broker/trading member of any segment is permitted to trade in retail market of debt segment, and b)an existing clearing member - any existing clearing member/self clearing member in derivative segment or currency derivatives segment is permitted to clear trades in both retail and institutional market of debt segment Proprietary (own account) membership for specified institutions : With an objective to permit specified institutions such as scheduled commercial banks, primary dealers, pension funds, provident funds, insurance companies, mutual funds and any other investors as may be specified by sectoral regulators from time to time to trade only on their own account in the institutional market of debt segment, it is proposed to provide for membership as " Proprietary trading members" to aforesaid specified institutions. 3/7

4 4.0 Proposal: In view of the above, the proposed amendments to Broker Regulations are as under- 4.1 Amendment in Regulation 2 : i. The definition of clearing members, self clearing members, trading members is to be amended to include debt segment in addition to derivatives segment/ derivatives exchange and currency derivatives segment. ii. The definition of "proprietary trading member" be inserted for the purpose of permitting specified institutions such as scheduled commercial banks, primary dealers, pension funds, provident funds, insurance companies, mutual funds and any other investors as may be specified by sectoral regulators from time to time to trade only on their own account in the institutional market of debt segment. 4.2 Amendment to introduce new Chapter IIIC in Broker Regulation : This chapter shall provide for registration of trading and clearing members (to include trading member / proprietary trading member /self clearing member/clearing member) of debt segment and shall inter-alia stipulate application for registration as trading member/ clearing member/ proprietary trading member, consideration of application, procedure for registration, procedure for not granting or refusing registration, payment of fees, code of conduct, procedure for inspection, procedure for action in case of default and general obligations and responsibilities and other provisions relating thereto. These provisions would broadly be in line with existing provisions for other segments in Broker Regulations. Accordingly, the proposed net worth and deposit for proprietary trading member(prop TM), trading member(tm), clearing member(cm) and self clearing member (SCM)in debt segment is as under - Category Net worth(rs) Deposit( Rs) Prop TM 50 lacs As per circular SEBI circular dated December 19,2012 on Base Minimum Capital 4/7

5 TM 50 lacs As per circular SEBI circular dated December 19,2012 on Base minimum capital SCM I crore 50 lacs CM 3 crore 1 crore (Prescribed net worth and deposit of other segments is given as Annexure A) 4.3 Application Form :Application form for registration as trading member / proprietary trading member /self clearing member/clearing member of debt segment may be specified. 4.4 Introducing Schedule IV B: Schedule IV B may be introduced on fees to be paid by trading member / proprietary trading member /self clearing member/clearing member of a debt segment of a stock exchange /clearing corporation. The is proposed thati. Every TM and Prop TM have to pay fees annually to SEBI at the rate not exceeding ( ) percent of the turnover i.e. Rs 2.5 per crore for all transactions undertaken by her in the debt segment. ii. CM/SCM have to pay a fee of rupees fifty thousand every year to SEBI till registration is in force. (The fee paid in other segments is given in Annexure A) 5.0 The Board is requested to consider and approve the above proposal to - i. authorise the Chairman to decide the quantum of the turnover fee to be levied on trading member and proprietary trading member in the SEBI (Broker and Sub-Broker) Regulations, 1992 and notify the same; and ii. amend the SEBI (Broker and Sub-Broker) Regulations, 1992 and authorise the Chairman to make such necessary and consequential or incidental changes to the SEBI (Broker and Sub-Broker) Regulations, 1992 and take consequent steps, as may be deemed appropriate, to give effect to the decision. ************** 5/7

6 Annexure A 1)Net worth and Deposit for other segments: Segment TM/Stock broker CM SCM Cash/Equity Net worth Paid up capital - 30 Not applicable Not applicable lacs for corporates at NSE/BSE Deposit As per circular SEBI - - circular dated December 19,2012 on Base minimum capital Derivatives Net worth Specified by SE 3crores 1 crore Deposit As per circular SEBI 50 lacs 50 lacs circular dated December 19,2012 on Base minimum capital Currency Net worth 1 crore 10 crore 5crores Derivatives Deposit As per circular SEBI 50 lacs Nil circular dated December 19,2012 on Base minimum capital 2) Fees for other segments: Segment TM CM//SCM Cash/Equity For All sale and purchase Transactions in NA securities other than debt securities - Rs 10 per crore ( percent) For all sale and purchase Transactions in debt securities - Rs 2.5 per crore ( percent) Derivatives Rs 10 per crore( percent) Rs 50000/- per year till 6/7

7 Currency Derivatives Rs 10 per crore ( percent) - fro CD contracts Rs 2.5 per crore( percent) - for interest rate derivatives contracts registration continues Rs 50000/- per year till registration continues *************** 7/7