Pre trade Risk Controls by SEBI
SEBI issued ciruclar vide CIR/MRD/DP/34/2012 on 13 Dec 2012 with a view to prevent aberrant orders and/or uncontrolled trades. It helps to prevent disruption of trading at exchanges due to such incidents. The recent flash crash of 900 points in niftydue to an errant order by one of the trading members caused SEBI to issue Pre trade Risk Controls circular. It is intended to introduce additional risk control measures.
Pre trade Risk Controls are broadly divided into three categories
1) Order Level Checks
2) Dynamic Price Bands (earlier called Dummy Filters or Operating Range)
3) Risk Reduction Mode
-Order Level Checks
Applicable for all orders placed on Stocks, Exchange Traded Funds (ETFs), Index Futures and Stock futures. No order of above 10 Crore value should not be placed in normal market for execution. Exchanges should ensure that brokers check individual client risk profile before placing orders for value or quantity checks.
Exchanges have to ensure that brokers have in place a mechanism to limit the cumulative value of all the unexecuted orders below a threshold levels set by them. Exchanges should monitor the controls and levy deterrent penalties in case of failure to observe them by stock brokers.
-Dynamic Price Bands (earlier called Dummy Filters or Operating Range)
As a part of Pre trade Risk Controls dynamic price bands are changed to 10% . Presently these are set at 20%. Dynamic price bands are applicable for the following instruments traded on exchanges.
(a) Stocks on which derivatives products are available,
(b) Stocks included in indices on which derivatives products are available,
(c) Index futures,
(d) Stock futures.
In case of direction of movement in either direction the price band will be relaxed only by increments of 5% only. Presently these are in increments of 10%. Stock Exchanges are allowed to make suitable rules in mutual consultation as these are inte exchange related.
-Risk Reduction Mode
Whenever the margin exposures of stock brokers crosses 90% of their collateral margins, exchanges must put such brokers under risk reduction mode. All unexecuted pending orders must be cancelled once the stock broker is put under risk reduction mode. Only IOC (Immediate or Cancel) orders shall be allowed and each order will be checked for margin sufficiency. The stock brokers will be put in normal mode from risk reduction mode only after their margin utilization levels fall below 90% levels of their collateral.
Exchanges can place more stringent rules if deemed necessary than prescribed in the Pre trade Risk Controls circular.
Please see the Pre trade Risk Controls circular issued by SEBI for details