CAPITAL MARKET SEGMENT Circular No Sub: SMART ORDER ROUTING

Transcription

1 CAPITAL MARKET SEGMENT Circular No. 119 Sub: SMART ORDER ROUTING Date: October 13, 2010 Download No.: Prerana Nair Pramod Kumar Das Rashmi Kumari Kapil Jaikalyani Deepen Modi Amit Thakkar Technical queries No of Pages: 14 The Securities & Exchange Board of India (SEBI) has approved providing Smart Order Routing (SOR) facility vide circular no. CIR/MRD/DP/26/2010 dated August 27, SOR would enable the brokers trading engines to systematically choose the execution destination based on factors viz. price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Application for permission: Members desirous of providing SOR facility shall make an application to the Exchange which shall constitute of following documents. a. Application b. Undertaking c. Feature List The format of the Application is enclosed (Annexure A & B). The format of the Undertaking is enclosed (Annexure C) Eligibility: SOR facility is allowed to be offered to all class of investors as specified in SEBI circular. Member-client agreement: Members shall execute an agreement with such clients who are desirous of availing the SOR facilities offered by the member, specifying clearly the features of the Smart Order Routing facility and the obligations and rights associated with SOR facility as per model agreement prepared by the Exchange for this purpose. Members shall ensure that the agreement entered into with their clients for SOR facility should not have any clause that is less stringent/contrary to the conditions in the proposed model agreement. The format of the model agreement is enclosed (Annexure D).

2 Requirements: a. SOR can be used only to route orders to recognised stock exchanges. Member should ensure that their approved SOR facility should not place orders at venues other than the recognized stock exchanges. b. The broker server routing orders placed through Smart Order Routing system of the Exchange shall be located in India. c. Existing obligations as per the current regulations and circulars will continue. Best Execution Policy This Best Execution Policy sets forth policy and execution methodology for client execution on the best terms. Upon acceptance of a client order for securities listed on a securities exchange within India and on specific client instruction regarding execution, trading member shall endeavor to execute that order in accordance with the following policy: a. Where the security is listed and/or traded on multiple recognised stock exchanges (multiple listing), the trading member shall determine the recognized stock exchange where to route the order or part of the order based on factors like Price, comparable Market Data, Speed of execution, Market Depth, Liquidity, Cost of execution, and Likelihood of execution & Size of the order. b. All SOR orders shall be of the order type Immediate or Cancel ( IOC ) Identification of orders routed through Smart Order Routing Trading members providing Smart Order Routing facility are required to populate the following values in the field provided (15 digits) in the order structure for every order emanating from system approved for SOR Digits Value Description 13th digit 0 or 1 or 2 or 3 0 (for Algorithmic order) 1 (for non-algorithmic orders) 2 (for Algorithmic orders using SOR) 3 (for non-algorithmic orders using SOR) Procedures for granting permission for Smart Order Routing The Exchange shall grant permission to members for Smart Order Routing (SOR) on a case-bycase basis. Members are required to specify all the other recognised stock exchange(s) for which the SOR facility is being implemented at the time of seeking permission for the SOR facility from the Exchange. Further, members would be required to seek re-approval from the Exchange in case any changes to the approved SOR facility including inclusion / exclusion of other recognised stock exchange(s) to the SOR facility. Members are required to test the software on the NSE trading test environment during a prespecified time. On satisfactory completion of testing on the Exchange test environment, the member is required to give comprehensive demonstration of their SOR facility to the Exchange.

3 An application would be treated as complete only after a comprehensive demonstration and submission of all documents as required by Exchange is provided to the Exchange. On fulfillment of the conditions as satisfactory and meeting SEBI / Exchange minimum requirements, the Exchange would grant permission to the member to commence SOR facility. The software and systems proposed for SOR shall be duly certified by the Exchange empanelled System Auditor before grant of permission. The charges for system audit will be communicated separately. The system audit of the CTCL system conducted by the member on yearly basis should include Smart Order Routing system. Audit Trail Member should maintain logs of all activities of approved SOR facility to facilitate audit trail. The members should maintain record of orders, trades and data points for the basis of decision for routing of orders using SOR facility. Submission of statistics for Smart Order Routing Trading Member approved for providing SOR facility are required to report / confirm statistics for Smart Order Routing. The trading members are required to report / confirm segment-wise data of Number of Trades and Traded Value (Rs. in Crores) through NSE ENIT application. The members are required to upload this information on a weekly basis with the flexibility of reporting / confirming the information for previous 30 days. Additionally, Members would also be required to provide the segment-wise data of Number of registered clients for SOR facility through NSE ENIT application. Additional Safeguards Members may take such other measures and implement such other safeguards as they deem fit to ensure security and integrity of transactions. For and on behalf of National Stock Exchange of India Limited Suprabhat Lala Vice President

4 Annexure A Application form for permission for providing Smart Order Routing (To be executed on letterhead of the Member) We/I, having my/our Registered Office/Office at am/are trading member/s of the Capital Market segment / Futures and Options segment / Currency Derivatives segment of the National Stock Exchange of India Limited; hereby apply for the permission of the Exchange for providing Smart Order Routing. A. General S Particulars No. 1 Name of the Trading Member : 2 SEBI Registration number : 3 Registered Office/ Office address : Telephone : Fax No. : 4 Name of the Authorised Signatory and Designation 5 Contact address of the Authorised Signatory : Telephone No. : Fax No. : 6 Complete address of the order routing Server 7 Whether the software for the proposed Smart order routing is being developed by the member on his own 8 If not, name of software vendor developing Software 9 Please specify the other recognised stock exchange/s to which the smart order routing system will route orders (Member would be required to demonstrate order routing to the other recognised stock exchanges as specified in this column during the comprehensive demonstration) Details B. Network Security, Standards for interfaces and Protocols : S Whether Complied (Yes / Particulars No. No) 1 Whether the system for Smart Order Routing routes orders in a neutral manner. 2 Whether the system for Smart Order Routing

5 adheres to the Best Execution Policy as specified in the circular ( A write up shall be provided in this regard) 3 Whether provisions clearly describing the features of the smart order routing facility and the obligations and rights associated with smart order routing has been brought to the notice of clients, who are desirous of availing such facility and agreement for smart order routing has / will be signed with your clients as per the Model Member Client Agreement as per Annexure C 4 Whether smart order routing system maintains logs of all activities of smart order routing system which includes record of orders, trades and data points for the basis of decision that facilitate audit trail 5 Whether the Smart Order Routing has features for the client who has availed smart order routing facility to specify that he / they do not want to use the same for a particular order/s, and the same has / will be brought to the notice of clients. 6 Whether the system for Smart Order Routing is used to place orders at venues other than the recognised stock exchanges 7 Whether the system for Smart Order Routing carries out appropriate validation of all risk parameters before the orders are placed in the released to the Exchange 8 Whether unique numbering of orders / trades, identification of user ID, activities / alerts logs, as stipulated by Exchange are maintained in the system 9 Whether an alternative means of communication for placing orders is be available in case of link failure of the smart order routing facility. ( A write up shall be provided in this regard) 10 Whether broker server routing orders placed through Smart Order Routing system to the exchange trading system is located in India. C. Systems Operations : Whether the requirements of systems operations as stipulated by SEBI in this regard are complied with (A certificate in this regard as per Annexure A (1) shall be enclosed)

6 D. Risk Management : Whether the requirements of Risk Management as stipulated by SEBI in this regard are complied with (A certificate in this regard as per Annexure A (1) shall be enclosed) E. Others A comprehensive write-up on the feature list of the system for Smart Order Routing which will include details of the best execution policy to be enclosed. The write-up should include details of user authentication, best execution policy, risk management etc.

7 Annexure A1 NOTWITHSTANDING the generality of the above, the software provided complies with the following provisions in particular as directed by SEBI / NSE. S. No. Requirement Whether complied (Yes / No) 1 All transaction logs are maintained with proper audit facilities along with unique numbering for orders/trades (a write-up in this regard shall be enclosed) 2 Logic/priorities similar to those used by the Exchange is used to treat client orders. 3 Provision for maintenance of all activities / alerts log with audit trail available 4 Smart order routing (SOR) server internally generates unique numbering for all client orders/ trades. 5 Adequate provisions for maintaining back up systems and data storage capacity are available. 6 Adequate provisions for capacity planning including provisions to monitor system capacity utilisation and scalability of system on capacity utilisation are available 7 An alternative means of communication is arranged for in case of link failure ( A write up shall be provided in this regard) 8 The software provides for routing of orders through electronic / automated risk management systems of the broker to carry out appropriate validations of all risk parameters including Trading Limits, Position Limits and Exposure taken by client based on risk assessment, credit quality and available margins of the client. The software also provides for appropriate validations for Quantity Limits, Price Range Checks, Order Value, and Credit Checks before the orders are released to the Exchange 9 The software provides for Net position that can be outstanding so as to fully cover the risk emanating from the trades with the available margins of the specific client. 10 The software provides for appropriate authority levels to ensure that the limits can be setup only by the persons authorized by the risk / compliance manager. 11 All orders entered into the Smart order routing (SOR) system are offered to the market for matching and no cross trades are generated.

8 Annexure B NETWORK DIAGRAM (Kindly enclose detailed network architecture showing the geographical location of the order routing server for smart order router.)

9 Annexure C UNDERTAKING FOR AVAILING SMART ORDER ROUTING FACILITY I / We, an individual / a firm registered under the Indian Partnership Act, 1932 / a Company / body corporate incorporated under the Companies Act of 1956 / Act, 19, and residing at / having our registered office at give this UNDERTAKING on this the day of 20 at IN FAVOUR of National Stock Exchange of India Limited, a company incorporated under the Companies Act of 1956, with its registered office at "Exchange Plaza", Bandra - Kurla Complex, Bandra (E), Mumbai (hereinafter called "NSEIL") WHEREAS NSEIL, has prescribed the SMART ORDER ROUTING FACILITY which allows the trading member s trading engines to systematically choose the best execution destination based on factors viz. price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order as may be approved by NSEIL from time to time. NOW THEREFORE IN CONSIDERATION OF my / our application to NSEIL for approval for availing the SMART ORDER ROUTING FACILITY. I / We hereby IRREVOCABLY AND UNCONDITIONALLY UNDERTAKE and agree to abide by and be bound by the following terms and conditions:- 1. The SMART ORDER ROUTING shall route orders in a neutral manner. 2. That I / We shall execute Member Client agreement which will clearly prescribe the features of SMART ORDER ROUTING facility and the obligations and rights associated with SMART ORDER ROUTING Facility. 3. That I / We shall formulate best execution policy and communicate the same to my clients. 4. That I / We shall notify to my / our clients if any material changes are made in best execution policy. Such Changes shall be preceded by a notice of 15 days. 5. That I / We shall ensure that our best execution policy at all times shall be in compliance with best execution guidelines prescribed by the Exchange / SEBI from time to time. 6. That I / We shall carry out changes to the SMART ORDER ROUTING software only after getting a specific prior approval of the NSEIL in this regard. 7. That I / We shall ensure that all orders pertaining to SMART ORDER ROUTING facility would only be routed through the platform of respective recognized stock exchanges. I / We shall ensure that all orders entered into the SMART ORDER routing system are offered to the market for matching and no cross trades are generated. 8. That I / We shall maintain logs of all the activities to facilitate audit trail and shall also maintain records of orders, trades and data points for the basis of decision. 9. In case wherein client does not want to use SMART ORDER ROUTING facility for a particular order, the same shall be well documented by me / us.

10 10. That I / We shall carry out periodic system audit of the SMART ORDER ROUTING facility as may be specified by the Exchange from time to time and a Certificate in this regard shall be submitted to the Exchange. 11. That I / We shall carry out appropriate validation of all risk parameters before the orders are placed in the SMART ORDER ROUTING system. 12. That I / We shall ensure that alternative mode of trading system is available in case of failure of SMART ORDER ROUTING facility and I / We agree to bring the same to the notice of client. 13. That I / We shall ensure that the server which is routing orders placed through SMART ORDER ROUTING system to the exchange trading system is located in India. 14. That I / We shall co-operate with the Exchange to resolve Investor grievance if any, received with regard to SMART ORDER ROUTING. Further, in case of any disputes or complaints, I / We shall share necessary data as and when required in order to facilitate necessary examination. 15. That I / We agree that NSEIL decision with respect to SMART ORDER Routing facility will be binding on me / us and I / We hereby agree not to dispute the same. 16. That I / We agree that NSEIL approval with respect to SMART ORDER Routing system shall be specific with respect to recognized Stock Exchange(s) and I / We hereby agree that in case of any addition of recognized Stock Exchange(s) I / We shall be required to get a separate specific approval. 17. That I / We shall abide by all other obligations which are applicable to me / us as per rules, regulations, guidelines and circulars in force from time to time. IN WITNESS WHEREOF this Undertaking is executed by the undersigned on the day, month, year and the place first mentioned above. Signed by, for and on behalf of: Before:

11 ANNEXURE INSTRUCTIONS FOR UNDERTAKING 1. The Undertaking is to be executed on a non-judicial stamp paper worth Rs.100/- if executed in State of Maharashtra. If this Undertaking is executed outside the State of Maharashtra, then it must be executed on a non judicial stamp paper stamped in accordance to the duty as payable in the place of execution or on a non-judicial stamp paper worth Rs. 100/- whichever is higher. 2. Further this Undertaking (including all annexures / schedules) has to be notarised before a Notary Public. 3. All the pages of this Undertaking (including all annexures / schedules) have to be signed in full. The persons signing should also sign in full at all places in the Undertaking where anything has been hand-written / any corrections have been made. If the Trading Member is an individual, then the Undertaking has to be signed by the individual Trading Member himself. If the Trading member is a firm, then ALL the partners are required to sign this Undertaking. If the Trading Member is a corporate, then the Undertaking has to be signed by the Managing Director or any two Directors of the company named as an authorised signatories of the company. If the Trading Member is a corporate, the Undertaking has to be accompanied with a certified copy of the resolution of the Board of Directors of the company authorising the person(s) executing the undertaking to do so. The Common Seal of the company has to be affixed by the company on this Undertaking in the presence of such persons as authorised by the Articles of Association of the company. The Board Resolution should clearly state that the affixation of common seal shall be made in the presence of such persons as authorised by the Articles of Association of the company and should also clearly state the names of such persons. The above persons should sign the undertaking as a token of their presence when the common seal is affixed.

12 Annexure D MODEL MEMBER-CLIENT AGREEMENT This agreement is made at this day of between XYZ (member of National Stock Exchange of India Ltd with SEBI Registration No.: ) & hereinafter called MEMBER and having its registered office at, and a individual/company/trust/firm or any other body duly formed and registered under the relevant Act, hereinafter called the CLIENT, having its residence/registered office at. WITNESSTH: Whereas MEMBER is registered as TRADING MEMBER of National Stock Exchange of India and Exchanges. Whereas the MEMBER is eligible to provide Smart Order Routing facility to clients as per the rules of the Exchanges & SEBI which allows the Trading Members trading engines to systematically choose the execution destination based on factors viz. price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Whereas the client is desirous of investing / trading in those securities admitted for dealing on the Exchange as defined in the Bye-Laws of the Exchange and have entered into Member Client Agreement with the Trading Member. Further for this purpose, the CLIENT is desirous of using Smart Order Routing facility which allows Member s trading engines to systematically choose the best execution destination based on factors viz. price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Whereas the Trading member shall establish & implement effective arrangement so as to ensure best execution for its clients taking into account factors viz. price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of the order. Basic features of SMART ORDER ROUTING facility Whereas trading member shall route orders in a neutral manner. Whereas trading member has explained the best execution policy and its features for SMART ORDER ROUTING facility to the client and the same are attached as Annexure 1 herewith. Whereas client has understood the features of best execution policy and given their consent for executing orders by using SMART ORDER ROUTING facility. Whereas trading member shall carry out appropriate validation of all risk parameters before the orders are placed through the SMART ORDER ROUTING system.

13 Obligations/Rights 1. Whereas trading member & client agrees that all the rights & obligations of both the parties as per model Member Client Agreement executed between them and provisions as may be applicable from time to time and shall continue to be binding to them. 2. Trading member has formulated best execution policy in accordance with specifications provided by SEBI/Exchanges from time to time. 3. Trading member agrees to send copy of this SMART ORDER ROUTING agreement to the client. 4. Trading member has brought the contents of best execution policy to the notice of client and made him aware of the significance of the said document. The client agrees that he has understood the contents of best execution policy. 5. Trading member shall notify to clients of any material changes in its order execution policy. Such change needs to be preceded by a notice of 15 days. 6. Trading member shall demonstrate to their clients at their request, that it had ensured best execution of client orders in accordance with its best execution Policy. 7. Trading member and client agrees that in case the client has availed Smart Order Routing facility and does not want to use the same for a particular order, the same shall be well documented by the trading member. 8. Trading member shall ensure that alternative mode of trading system is available in case of failure of Smart Order Routing facility and client understands that in case of failure of Smart Order Routing facility alternative modes are available to him to place orders. 9. Trading member agrees to maintain logs of all activities to facilitate audit trail. Trading member shall maintain record of orders, trades and data points for the basis of decision. The Member and the Client are aware of the provisions of Bye-Laws, Rules and Regulations of the Exchange relating to resolution of disputes/differences through the mechanism of arbitration provided by the Exchange and agree to abide by the said provisions. The provisions of this agreement shall always be subject to Government notifications, any rules, regulations, byelaws, circulars and guidelines issued by SEBI and Stock Exchange rules, regulations and Bye-laws that may be in force from time to time. The agreement entered into between the MEMBER and the CLIENT shall stand terminated by mutual consent of the parties by giving at least one month written notice. IN WITNESS THEREOF, the parties to agreement have caused these presents to be executed as of the day and year first above written.

14 Signed for and on behalf of MEMBER : By : Signature : Title : Witness : Signed for and on behalf of CLIENT : By : Signature : Title : Witness :