Modified Carry Forward System (MCFS)
The Modified Carry Forward System (MCFS) which emerges from the
recommendations of the Group (majority view) is summarized below.
Precondition for adopting MCFS in any exchange
Any exchange which intends to adopt the MCFS must demonstrate that
it has a well designed software for margin computation and well
established governance structures and administrative infrastructure
for monitoring and enforcing the margining system.
Prior to granting permission to an exchange to adopt the MCFS, SEBI should
carry out an inspection of the exchange to satisfy itself about the
adequacy of its margining system. A further inspection of the
exchange should be carried out six months after adoption of MCFS to
verify that the margining system works properly under actual
trading conditions.
Shares eligible for inclusion in MCFS
Though the actual choice of scrips for carry forward is a decision
to be left to the exchange, it is essential for market integrity
that the scrips have a sufficient floating stock and high
liquidity.
Uniform margin
A uniform minimum margin of 10% would be imposed on both carry
forward trades and delivery trades on gross basis. This is a
minimum margin and exchanges would be free to levy higher margins.
Moreover, in periods of excessive volatility as in mid January 1997
or end March 1997, there may be a need to step up the margins
temporarily. Margin payments by the brokers must be value dated the
same day.
Over a period of time, exchanges must move towards
realization of all margin payments before the next day's trading
begins. The Group reiterates that margins must be levied on gross
positions as is mandated at present. Exchanges may levy ad hoc
margins on members who are considered financially weak or have
positions which are unduly large in relation to their capital
adequacy.
The only exception to the uniform margining system would be for
sale transactions where the seller deposits the shares up-front for
delivery.
Capital adequacy and other prudential guidelines
The Group reiterates the importance of maintaining capital adequacy
ratios at such levels as SEBI may mandate from time to time, and of
conforming to various prudential guidelines of SEBI like
segregation of broker and client accounts both for money and for
shares.
Vyaj badla
In the case of vyaj badla in respect of dematerialised shares, a pledge of the shares should be marketed in the electronic records of the depository. In the paper based system, the Group recommends that shares received by vyaj badla financiers should continue to be deposited with the clearing house as at present. In addition to other risk containment measures, the clearing house should at all points of time have an insurance policy covering the aggregate value of shares lying in the clearing house.
Regulatory powers of the exchanges
Exchanges may suspend carry forward trading in any scrip when
aggregate outstanding position in any security exceeds pre-
announced limits. Exchanges should have adequate monitoring and
surveillance systems to enable timely use of the various powers
vested in them to regulate the market.
- Note of Dissent to The Report of the Group to Review the Carry Forward System By Dr. R. H. Patil
M. G. Damani
K. Kannan
M. M. Kapoor
R. H. Patil
J. R. Varma
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