Shares Registrar or Stock Transfer Agent

In my earlier post, I discussed about Share Registrar and this article will focus on how investor’s shares are handled in share issuer’s book. Just assume, you are making your own company as public limited company and many people buying your shares and it is your right to know who is holding your shares. This article is to explain more about that.

What is Share transfer agent?

An agent who takes care of the investor’s name and details on behalf of the share issuer. Every organisation before issuing shares in the market (as of now just ignore IPO) they will appoint one Shares Registrar or transfer agent and their duty is to record the investors details like name and domicile details for each buy and sell of the shares. Registrar even conducts proxy voting, annual meetings etc. on behalf of the share issuer.

Main functions of the stock transfer agent is below

  1. Maintain electronic repository to reflect the ownership of the shares
  2. Act as intermediary for the company to corporate action pay outs and mailing agent of the company annual reports to investors.

Registrar will be called as different name in different countries. For example in US and Canada it is called as Stock Transfer agent, UK it is called as Share registry and in India as Registrar. Even though name differs in different regions, their responsibilities and functions remains the same. In today world there is no global registrar available but each and every market is dominated by different registrars because of the technology constraint. Why technology constraint? Registrar need to build interface with Central Security Depository of the each and every market to get owner details of the share and it will be very costly approach, even if none of the Share brokers in the world  are not connected to all the exchanges (mostly connected through regional brokers).

For Indian registrars kindly refer the below link in NSDL website

For US stock transfer agents, kindly refer the below link

In Singapore, BoardRoom is the share registrar for most of the stocks.

Above one explains the role of Registrars and their functions. Now let us see how the ownership recorded for citizens of the country and foreign investors. How your name is recorded in the Registrars books? If not how? How brokers keep your shares in their books? Is it safely kept?

This article will answer all the above questions.


To understand the registrar function we need to first know about how brokers kept your shares in the brokerage firm. It differs from country to country and in high level I analysed few countries so that it will be helpful for the people who read this.

Usually shares can be kept in below form in brokerage firm

  1. Certified form or paper form.
  2. Electronic form along with direct registration under your name in Central Securities Depository of the country.
  3. Electronic form but it will be under nominee name which is your broker name. Your shares will be bundled with other clients of the broker and registered with CSD against the broker name. This process of registering against broker name with CSD will be called as Nominee account or Street name (varies from country to country).
  4. Few institutional clients have account with broker and broker will register their shares with CSD as nominee but the difference is that their shares will not be mixed with other client holdings of the broker.

Most of the shares in today world will fall under category 2 & 3 of the above. Let me explain both categories so that we can understand how share owner names are registered in registrar books. 

Category 2:

Most of the residents of the country will fall under this category i.e.) they need to open account with CSD before they start trading and it again differs from country to country. Let me give few examples in different global markets so that it will be easy to understand.

Singapore market: In Singapore market, if citizens or foreigners residing in Singapore, they have to open CDP account with SGX then only they can start trading. You can have any number of brokerage accounts with different broker, but all must be linked to one CDP account. CDP is the CSD for Singapore market and while opening account in CDP you have to give your identification details so that whenever trade gets executed against your account, it will be recorded and registrar will get this information. Refer the below link for account opening form

Indian market:

In Indian market there are two CSD’s namely NSDL and CSDL. NSDL is promoted by NSE and CSDL is promoted by BSE. If a citizen wants to invest in Indian equity market (later we can see about FII) then they have to open DEMAT account with anyone of the CSD and in India mostly it will be taken care by brokers (they are called as DA’s or Depository Agents). Based on the investors requirement DA’s will take care of the DEMAT account opening with Depository Participants (DP’s or CSD). Even you can open account with two DP’s and you can transfer the share from NSDL to CSDL and vice versa. DEMAT account will hold your shares in dematerialised form in the depository. When account is  opened, all the investor details will be recorded. Because all the investor details are recorded and when executed trades move to CSD ,it will be recorded against your name. In other words, this mechanism is called as Bullet proof because it is recorded against the individual name in CSD of the country.

UK market:

CREST is Central Securities depository for UK, Irish equities and other few international securities. CREST stands for Certificateless Registry for Electronic Shares Transfer. In UK if you want your shares to be registered against your name, then you can open account with CREST and all your holdings will be registered against your name in CREST (CSD). Else you can trade using nominee account and in this process, securities will not be registered against your name in CREST. Even CREST hold securities of other international markets, for example CREST is a member of DTC so that you can do cross border transfer which I will discuss in my next post.

US market:

DTCC (Depository Trust and Clearing Corporation) is the central security depository for all the US Exchanges. Same like UK if US citizen wants to hold their shares in their own name they can create an account in DTCC and they can hold shares against their name. Even holding shares via nominee account, US provides different service to register the shares under the investor’s name through different service called Direct Security Registration service and by using this service investors can bullet proof their name against the shares even it is bought via broker using nominee account (we can see this service in more detailed manner below)

As of now we saw about how different market register the share owner’s name. Now we can see in detailed manner how nominee accounts are handled.

Category 3:

Category 3 is the most used model especially in cross-border trading and it is widely accepted as well. Most of the investors wants to trade different markets using one account with broker. If the investor have multiple accounts with different broker, then it will be difficult for investor to manage the investment portfolio. Hence investor open an trading account with broker and broker using nominee account (Omnibus account) access different markets on behalf of the investors. Brokers will not hold those securities in their books and it will be parked under Custodians books (please refer my previous article about Custodians). Only drawback in this approach is that investor name will not be recorded in any of the exchanges which he/she bought/sold and in everywhere it will be under the nominee name, which is also called as Street name. One more drawback is that your assets will be bundled with other investor stocks and held with Custodians, for this reason we have to select trust-able/reliable broker who will take care of your holdings properly.

In US market it is different case, DTCC provides one alternate approach for investors to register the shares against their name in CSD using DRS (Direct Registration Service). Most of the US brokers will provide this service but they put charge for this process and actually behind the scene it is like transfer of Custodian service from broker’s custodian to DTCC custodian service. For more details on the DRS please refer the DTCC website below.

I am sure after reading this post you would have got some idea how share owners name are registered in registrar books and keep in mind if we buy through nominee account of the broker it will be parked under street name only.

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Impact of Indian economy – Remittance by NRI’s

Impact of Indian economy – Remittance by NRI’s

Indian economy is one of the world largest and booming economy and it is next to China but still India has high CAD (current account deficit) due to less export compared to import. Earlier in one of my post I mentioned about gold import which contributes mainly to CAD but the major one is oil import and the tricky one is India’s highest export product is purified oil which we can see later in some other post. Even though export is less but still somehow CAD is managed by FDI (Foreign Direct Investors), FII’s (Foreign Institutional Investors) and Remittance. Now in this article we will see how Remittance helps Indian economy.

What is Remittance?

A remittance is a transfer of money by a foreign worker to an individual in his or her home country. Money sent home by migrants competes with international aid as one of the largest financial inflows to developing countries.

Will you believe? India is the world largest remittance market in the world bigger than China. What it means? Every month or year considerable amount of other country currencies are getting in RBI hands which provides considerable support to India’s foreign currency reserves and remittances constitute 3 to 4% of India’s GDP every year.

Remittance Stats

For remittance statistics, kindly refer the World Bank data

Impact of global financial crisis:

Global financial crisis played a major role in remittance and in this mortgage crisis Indian economy was least affected compared to other countries. There was increase in exchange rate of Indian currency which tempted the NRI’s to bring the investments back to India. Fall of asset prices in India was also a plus for NRI’s to invest in India instead of holding the currencies in the foreign country. In period of 2008-2009 only there was reduction in remittance money and after that there was steady increase in inflow of money.

Remittance to India:

Remittance to India is happening through banks and money transfer operators (MTO) like Western Union Transfer, Remit2India etc. Most of the people used banks for remittance because it is high secure and reliable compared to MTO and exchange rate differs from bank to bank. People used banks remittance to build credit history as well to get loans in Indian banks. Processing fee/service charge differs from bank to bank and because of this reason few people are using black market to remit the money. Currently RBI is implementing various regulatory measures to control illegal transfers. Lot of unskilled workers abroad send their money back to home town illegally because they don’t know the benefits of building credit history in banks and they simply look at the exchange rate provided in the black market. RBI and banks should start educating the people and encouraging them to use bank transfers. RBI must also regulate the exchange rate provided by the banks and service charge so that the black market transfers can be controlled. Illegal black market is called as Hawala market in India which accounts almost 30-40% of the remittance and if this money also is brought into legal transfer it will also contributes to the Indian economy.

Conclusion is that remittance contributes significant value to the economy hence RBI has to regulate this carefully and encourage the remittance participants so that they will invest more in India.

Conclusion is that remittance contributes significant value to the economy hence RBI has to regulate this carefully and encourage the remittance participants so that they will invest more in India.

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Precious Metal – GOLD

Precious Metal – GOLD

Last few days there is fall in gold prices and this post is not related to that, while studying the reason behind the fall I grabbed few things so thought of sharing that here.

Gold reserve in Indian households alone is 22,000 tonnes which is equal to $1.16 trillion (almost 5 lakh crores of INR). Just imagine half of this money is circulating in the form of government bonds or some other investment schemes which is running by Indian government then no need for Indian government to borrow money from World Bank. Every year we are running our country with deficit money just look at the below tabular column with revenue and expense details of India which is published by IMF. Projection for next five years looks with deficit amount and it looks government has to either borrow money from IMF or some other country or has to release bonds to get money.


Link for the above data is below

Major of our CAD (Current account deficit) is happening because of the oil import and the next biggest is gold. Oil import is essential because it is much needed for everyday life but gold we are just buying either as a savings purpose or sentimental purpose or ornamental purpose. Gold export industries contributes significant value to our economy, almost 2.5 million (25 lakhs) people are employed and also Indian designed gold jewels/gems export contributes significant value to Indian economy. Although the gold export plays a significant role its very minimal when compared to the gold import ratio. Government also should adapt different market strategy to increase Indian jewelry export so that we can increase our export ratio. Currently gold export is one of the growing export industries in India and for the bright future government should encourage those industry people.

Why more gold demand in world?

Gold has long captured humankind’s imagination. It is malleable, ductile and corrosion resistant and it has many uses from jewellery to technologies (phones, spacecraft etc.)

1.  Many people believe jewellery has sentimental value hence they will keep on buying in addition to their usage. Few gold ornaments will be believed as inter-generation asset hence it will be associated with family for longer time.

2.  Some people believe gold is religious especially in Indian temples to show their love to god they will give gold ornaments to temple. .

3. Central bank view gold as reserve asset hence they will buy more gold instead of sell.

Why Indians got more attached with Gold?

Demand for gold in India is always there for many years because it is tied with our culture and finance protection. In India lower middle class people always consider gold as their safest investment because they can easily sell the product and convert into cash easily. Every street you can see pawn brokers so it is easy convertible asset for lower middle class and also those people have zero knowledge on other investment products so you can’t blame them saying don’t buy gold it is the critical contribution to CAD. Capital protection for gold is always there, so in India where there are huge number of middle class people buying gold becomes very important. Government has to find different way to rotate the surplus gold which is present in Indian households so that they can reduce the gold imports and educate the people to use other investment products. As per the latest survey which is published by FICCI, 75% of the Indians used gold for safest investment and the rest only use gold for ornament purpose.

Important things government must do for making our future generation to live happily and debt free

  1. Reduce the imports of gold by rotating the gold which is present in Indian households by proposing scheme with gold deposits.
  2. Propose new investment schemes with gold so that people can use such scheme for investment instead of buying gold.
  3. Build recycle technologies to recycle the gold from electronic waste especially used sim cards, phones, old laptops, computers etc.
  4. Make marketing of Indian jewellery/gems like Swiss watches. Create a brand tag by showcasing our gold designs and our preparation styles by conducting World level symposium and give tax benefits   for those people who involved.

Currently government is planned to release government sovereign gold bonds which is nothing but paper certificates of gold. Earlier in 1999 also government introduced gold based scheme but it is not well received by public. We can discuss on both the schemes later.

Recycling of gold:

Recycling of gold happens in two ways either from human (selling) or recycling from electronic waste. Recycling from human either by selling the gold because of financial crunch or investors to make profit because of the increase in price.  However recycling of gold varies from region to region and for example during 2009-2013 crisis lot of banks/institutions/investors sold gold that increases gold recycling in western countries which accounts almost 43% of the gold they hold. Fortunately India/China is not affected hence recycling rate is low hence I am not saying we should get affect by recession. By checking the data it looks whenever there is unemployment there is rise in recycle of gold. If we buy the gold at this rate then soon India will be in big debt and all the prices will rise very faster than now. Like the quote “Rich is getting richer and poor is getting poorer.” We Indians have to find alternate investments which should be benefited for both government and the citizens. 

Gold deposit scheme 1999 and few amendments in 2009/2013:

The primary reason for this scheme is to bring the idle gold in the country to reduce the gold imports and to provide opportunity for gold holders to earn interest on the idle asset which they hold in hand. For example in India temples or trust organization hold gold coins or gold bars for their future needs and if this gold is recycled it will reduce considerable import % of gold and in turn help to bring the economy upside.

Under this scheme, the owner of gold can deposit his gold, which may be in any physical form, with a designated bank in exchange for an interest bearing deposit certificate of certain tenure. The tenure earlier was between 3 to 7 years but in the recent guidelines of RBI, the tenure was changed to 6 months to 7 years to provide better liquidity to the investors. Any individual, whether singly or jointly or on behalf of a minor can make an application under this scheme. Mutual funds are also allowed to invest in this scheme, as per the recent guidelines. The minimum quantity of gold required to be tendered to apply for this scheme is 500 grams. However there is no upper limit up to which you can avail the benefits of this scheme. It is important to note that under this scheme, your gold will lose its original form and will be melted, tested and then minted into coins/bars. It will indicate the weight of pure gold in the gold deposited (999 fineness). A certificate will be issued once this process is completed; however a provisional receipt is issued by the bank immediately upon receiving the deposit. Interest to be paid is fixed by the concerned bank. For example, State Bank of India in the past had fixed interest rates for 3 years to be 0.75%, whereas for 4 years and 5 year tenures, it was 1%. Again, these percentages do not apply on the monetary value of gold deposited but as a percentage of the weight of gold deposited. For example, 1% of 500 grams would be 5 grams. This gold currency interest will be converted to rupees at a certain specific rate on the date of maturity or payout. Effectively you get interest amount calculated in gold terms.

After expiry of the tenure opted by you, there are 3 options viz.

  1. Renew the certificates.
  2. Receive the maturity amount in monetary terms at the prevalent rate of gold.
  3. Receive the gold back. Please note that when you exercise this option to receive the gold in physical form, you will be given gold bars and it would not be in the form in which you had surrendered.

There are certain benefits of the gold scheme such as – You can earn interest on idle physical gold lying in your lockers. While you benefit from the appreciation in the price of gold in both the cases, in case of GDS you also additionally earn interest on the gold. There is no wealth tax or income tax payable on either the gold or the income from it in case of GDS. In addition to the exemption for interest earned and wealth tax under this scheme, the deposit certificates are not treated as capital assets for the purpose of capital gains tax. Physical gold lying with you otherwise will attract wealth tax and capital gains tax on sale. There is no hassle of storage of gold and concern about its safety. There is no upper limit on how much gold can be deposited under the scheme. The minimum limit however is 500 grams. You can also avail loans against security of the certificates of gold deposit in Indian Rupees from any bank.

Few Demerits as well

1. Investors will lose the original jewellery design since the gold deposited is melted and converted to coins or bars. For a lot of people, this may be the biggest deterrent for investing in the scheme.

2. Investors may need to spend a lot on the making charges if you wish to convert the gold back into jewellery form

Refer the enclosed link for more details on this scheme


Alternate gold based investment scheme for investors

The Finance Minister in his budget speech for the Union Budget 2015-16 made the following announcement:

“India is one of the largest consumers of gold in the world and imports as much as 800-1000 tonnes of gold each year. Though stocks of gold in India are estimated to be over 20,000 tonnes, most of this gold is neither traded, nor monetized. I propose to… develop an alternate financial asset, a Sovereign Gold Bond, as an alternative to purchasing metal gold. The Bonds will carry a fixed rate of interest, and also be redeemable in cash in terms of the face value of the gold, at the time of redemption by the holder of the Bond

Refer the enclosed link for details

The main idea is to reduce the demand for physical gold. I feel this is one of the bold decisions which government has undertaken for controlling gold based investments. Instead of buying the physical form, government will issue gold based bond to investors with worth of 2 gram, 5 gram, etc. and in return on maturity there won’t be any physical delivery of gold but there will be cash delivery based on the prevailing market rate. The price of the bond would be linked to the price of gold and it would pay an interest as well to investors. Maturity of this bond is to 5-7 years and this is still in draft mode only.

There are few drawbacks as well because gold market is volatile and in India if you have gold in physical form you can easily get loan in banks/pawn brokers but this one is hard. People need to be educated as well to understand the scheme. If prices falls at least in physical form you own the gold and later you can sell but in this case on maturity investors will be more tricky state.

Whatever the case, buying gold will make our future generation with heavy burden because taxes will go high and then price of all the commodities will go high as well. To save the future generation and to reduce the debt of our country we should think of other alternate investments else we end up in paying huge taxes to government. Already in our country all the prices are going high and we keep on complaining without taking necessary steps then it will lead serious issue then a day will come soon there won’t be any meaning for the money we have in hand.

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Bitcoin – Crypto Currency

Bitcoin – Crypto Currency


Last month I came to know about this currency while surfing about IMF (International monetary fund) but this one will be next big sensation especially after current currency crisis in Greece. Actually currency crisis in Greece helped to increase the bitcoin value and slowly people started to accept “Virtual currencies are future”.

Just think a world there is no bank and there is no monetary policy to control interest rates as well for your currency and this world is called BITCOIN. To explain in simple it is purely peer-to-peer version of electronic cash that would allow online payments to be sent directly from one party to another without going through a financial institution. But please note Bitcoin is not official currency and it is still in experimental state but lot of online shopping, few stock exchanges in world also started to accept this currency and even few economist started to accept crypto currencies are next future world.

To understand more on the working model please go through the below link and it explains clearly about bitcoin architecture and working mechanism

Why people started to accept this currency and how it started to gain trust?

  1. Today if we wanted to transfer money to some other bank account means we have to depend on bank business days (possible to use on holidays but there is charge on your transaction) but in bitcoin there is no such concept and the transaction is instant.
  2. You worked so hard to earn money and kept them in saving but due to monetary policy of the country your interest rates will be reduced/increased. But in crypto currency model there is no such concept your valuation remains same.
  3. There is no chances of fraud because transaction is instant but the drawback is transaction is not reversible.
  4. In Greece crisis, banks have set money withdrawal limit in ATM to their country people. Just think a scenario where you cannot withdraw your money from your account and during that time even few Greek restaurants started to accept BITCOINS. Now this set as an example to rest of the world especially the countries who are in more debt like Japan, Spain, Portugal and they started to trust this currency.


  1. There is no centralized body to control this and people may use this for illegal activities like terrorist etc.
  2. Security of the bitcoin wallets are still questionable and it needs to be improved so that security concern won’t be there.

During 1970’s paper crunch when experts talked about dematerialised form of securities there were lot of opposition that it won’t be possible because people won’t trust such concepts. Now in Stock Exchange world 95% stocks are in dematerialised form and soon bitcoin will also come to reality. According to my view this bitcoin concept needs few regulations and adaptions so that it will get more popular and integral.

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Risk Management – OTC Derivatives

Risk Management – Over the Counter (OTC) Derivatives

Banks hold the loans and mortgages once they are originated.  Banks now handle billions and billions of money in derivative products. The growing volume of derivative markets across the globe and also the introduction of new products everyday more risk like counterparty credit risk, liquidity risk, operational risk etc to the investment banks/financial institutions/investors. Especially after 2008 Lehmann crash, as an IT person in bank I am able to see lot of regulatory projects like Dodd Frank, EMIR, CVA etc and this post is to understand the risk in derivatives and the role of Central Counter-parties in handling the risk.

Post trade activities in financial world is always associated with huge risk and I can say this is the heart of the trading infrastructure. Post trade activities means clearing and settlement. Clearing involves various post trade activities related to risk like netting, collateral and margin requirements. Exchange traded derivatives also possess risk like Over the Counter (OTC)  products but exchange traded always follows strict margin/collateral requirements and also cleared through Clearing house (Central Counterparty – CCP).

Almost 90% of the derivative products are traded in Over the Counter (OTC) and now it clearly shows why regulators are more concerned about this market. Just think one defaults in this markets and it will have huge impact on everyone. After Lehman crash, regulators in US and Europe are emphasizing that the OTC trades should be reported to repositories like DTCC and clearing must happen through clearing house(CCP) and non-cleared products should follow high margin requirements.

Clearing house – Central Counterparty (CCP)

A clearing house acts as a central counterparty for both buyers and sellers. In other words it will become seller to the buyer and buyer to the seller. It will solve the problem of counterpart default risk and CCP will bear the default risk of buyer and seller.

Usually settlement can happen in two ways namely

Bilateral settlement

Central clearing settlement


Bilateral settlement:

In bilateral settlement model, each members are exposed to default risk and if anyone fails it leads to serious issue. Look at the below diagram, just assume if Bank A goes default means rest of the banks will get impacted because almost everyone has open positions with Bank A. Because of this reason only all the regulators are worrying about OTC derivative market and imposing strict regulation policies.



Central Clearing model:

In central clearing model, CCP will own the risk of the clearing member and it will reduces the default and operational risk. But CCP imposes strict margin and collateral requirements. By moving towards CCP, derivatives trade becomes more transparent and reduces complexity. CCP will not be exposed to any market risk but in turn it is exposed to credit risk which is handled by strict risk functions such as margin and collaterals.



Counterparty risk management functions like netting, collateralization and DVP will be carried out in clearing house.

Let us take one derivate contract as an example (Interest Rate Swap – my favourite one) so that we can understand the CCP functions.

Consider a 5 year IRS with a notional value of $10 million and a fixed rate of 5 percent against a reference rate of six-month London Interbank Offer Rate (LIBOR), with semi-annual payments in arrears. It will have 10 Observation periods and by taking the difference between the prevailing six month LIBOR and 5 percent and then multiplying that number by $10 million.

Clearing and settling this swap involves the following:

Confirming the terms of the contract at T day.

Determining the payment obligation at the beginning of each six-month interval.

Settling payments due at the end of each six-month interval.

Maintaining the following records: terms of contract, payments made/received by the counterparties, and names, addresses, and account numbers of the counterparties.

Valuing the swap for purposes of determining collateral requirements.

Monitoring counterparty creditworthiness.

Determining collateral requirements

Valuation and monitoring of securities posted as collateral.

Let me continue on this later by tomorrow.

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Shanghai Hong Kong Connect – SHC

This is one of the initiative which I worked last year  and this one was pretty good learning. Let me give an overview this project and this is the first time China opening up the A-shares to foreigners. Because of this success there are even talks going on for Shenzhen link as well which is next big exchange in China. After working for this initiative only I came to know about Stock Exchange link concept ASEAN link, Shenzhen.  I will share the importance of linking the exchange in later post. Now we can see Shanghai Hong Kong Connect. Let me give an overview and continue tomorrow because my Saturday nights went with this blog and almost Sunday morning now 🙂 SHC is a link between Shanghai Exchange & Hong Kong exchange and using the link investors can trade using the local broker and clearing house.It  is the first controllable stock market(please note) access between the Mainland and Hong Kong by a broad range of investors. Eligible investors in Mainland China can purchase eligible shares listed on the Hong Kong Stock Exchange via their own local broker, while Hong Kong and international investors will be able to purchase eligible Shanghai-listed shares through their local broker as well. As part of this program Only A shares listed in Shanghai will be included in the initial stage.

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Economics of growth!!

Recently started to study this book and it is quite informative about world economics. Like to share the link here

Click to access aghionh9.pdf

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Clearing arrangements!!

Today I like to say few things about clearing. Clearing is an area which I started to work recently and when I started to work I had few basic doubts about various account in clearing like position account, house account, margin account and clearing arrangement between various trading brokers (fully disclosed and omnibus). Accounts are basic one which is very useful for beginners and clearing arrangement which will be very useful for everyone to understand the role of trading broker and clearing broker. Let us see in detail later.

In the earlier post I mentioned about clearing membership and it is very risky one in today finance industry. Clearing members have lot of policies and regulatory measures and because of that reason you can see many trading brokers but only few clearing brokers. I thought of understanding their roles and responsibilities so that we can understand the difficulty in playing such roles.

Few of the clearing broker’s responsibilities are

  1. extending credit in margin accounts
  2. providing written confirmations of executed orders to customers
  3. receiving or delivering funds or securities from or to customers
  4. maintaining books and records that reflect transactions, including rendering monthly or periodic statements of account to customers
  5. clearing and settling transactions effected in customer accounts
  6. opening, approving, and monitoring customer accounts

Before moving deeper, let’ just see how clearing are handled before IT system automation so that we can understand clwaerly. My usual practice is to understand the manual work style so that as an IT person I can give solution to automate. Risk comes from not knowing what you’re doing.

In olden days, if two clearing brokers have to clear trade means manually reconcile the trades between two parties and issue the confirmation then settle the trade by sharing certificates (shares) and cash. For example, if buyer broker X bought ABC Company common stock for a customer by purchasing from broker-dealer Y, X would settle the transaction directly with Y. A confirmation note would be generated by each broker for confirming the trade and then brokers will confirm their customers. After that broker X will send one person to Y location for giving cash and take stock delivery back, so that broker X can give the certificate back to the customer. Then slowly clearing world has thought of netting process because brokers have multiple trades for the same security for different customers that they moved into approach of net basis once a day i.e.) X would aggregate all transactions with Y as a counterparty, determine the total net amount bought and sold in a security, and the net amount to be received or paid for all securities.

For example, if X’s customers bought 500 shares, and sold 300 shares, of XYZ Company with Y as the counterparty broker, Y would be obligated to deliver 200 net shares to X. Likewise, the total amount to be received or paid from all transactions with a specific counter broker-dealer during the day would be netted once in a day.

Earlier I told about clearing membership is quite risky and costly as well for individuals. Every exchange has having their own capital requirements to qualify for clearing member because it involves huge transaction of money and also clearing member has to adhere to technology standards along with resource pool. The table below shows the requirement for becoming clearing member in NSE (National stock exchange of India). Because of these infrastructure and capital requirements, the number of clearing members or participants is limited.

Deposit & Networth Requirements(Individual / Partnership Firms)

Segment Type of Membership Cash-NSEIL Non-Cash NSEIL Cash NSCCL Non-Cash NSCCL Total Net Worth
Capital Market TM & SCM 26.5 6 17.5 50 75
Wholesale Debt Market TM & SCM 50  50 200

* TM = Trading Membership.
* TM & SCM = Trading and Self Clearing Membership.

Fees and Charges :

  • Application Processing Fees : 10,000/- + Applicable Service Tax.
  • Admission Fees : 5,00,000/- + Applicable Service Tax
  • Annual subscription charges (Captial Market Segment):For Corporates – 1,00,000 P.A.+ Applicable Service TaxFor Individuals/Partnership Firms – 50,000 P.A.+ Applicable Service Tax

By looking at the above cost you can easily guess how difficult to become clearing member with the capital required and also IT infrastructure cost. Then question comes in mind how I can clear my trades if I am not matching the clearing member criteria because I am a wealthy individual and became direct trading member with exchange (not through broker). Either you have to become self-clearing member by above standards (which I won’t because huge money and infrastructure) or clearing arrangements.

Clearing arrangements:

There are essentially two types of clearing arrangements, namely

  1. fully disclosed
  2. omnibus

In fully disclosed clearing agreement, the trading broker discloses the identity of each of its customers to its clearing broker. The clearing broker then establishes on its books and records an account in the name of each introduced customer and “carries” that account with its own net capital.  Moreover, the clearing broker prepares trade confirmations and monthly statements for each introduced customer.

In omnibus clearing agreement, the trading broker neither discloses the identity of its customers to the clearing broker, nor its customers are informed of the existence of the omnibus clearing arrangement. An omnibus introducing firm usually maintains one “omnibus” account with its clearing broker. The omnibus introducing firm maintains its own records of its customers’ trades, provides its own trade confirmations and monthly statements to its customers and performs all “customer-side” settlement functions.

There are many accounts in clearing and I am just listing few for reference

House Account

  1. An investment account a brokerage firm uses for its own investments, rather than those on behalf of a client.
  2. An investment account in a brokerage that is large or otherwise important enough to be managed from the brokerage’s main office, often with a major executive as the broker.


Omnibus Account

  1. An account carried by a member firm for a non-member correspondent firm.
  2. In futures and options, an account that one broker holds with another in which all of the first broker’s sub-accounts are combined under one heading and traded in that broker’s name.

Clearing functions:

Give up:

An action where executing broker will place the trade on behalf of some other broker.

For example:  Broker X gets a buy order from a client but is too busy to place the trade, so he asks Broker Y to place the order for him/her. Broker Y then buys the stock from Broker Z on behalf of Broker X’s client. However the floor Broker Y places the trade, he must “give up” the transaction and record it as if Broker X placed the trade since the client belongs to him/her.  Thus, the transaction is recorded as if X & Z made the trade, even though Floor Broker Y executed the trade

Take up:

Take up is the action where other side of the clearing broker will do on give up. Basically if someone did give up then other side will do take up.


An option holder want to exercise means then he/she will inform the broker, then they will raise request to clearing house for exercising the option.


Throughout the trading day our clearing houses monitor the positions and market exposure of each clearing member to ensure that there are enough funds on deposit to cover their risk. This is done through real-time profit and loss calculations using up-to-date pricing and position monitoring. Margin requirement varies from exchange to exchange and even within exchange it depends on asset classification.

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How securities trading and settlement works?

How securities trading and settlement works?

When I started working with my cash equity implementation I had numerous questions in my mind, especially how shares are transferred between two parties, how book keeping works, margining, and also how delivery vs payment works. On working in clearing engine initiative I did few studies on clearing and settlement process that helped me in understanding different players and their roles in Equity trading. Before getting into more details on the different roles in trading I would like to explain the entire system with and without IT system. Actually IT system automation reduces more manual work in trading(proud to say I am part of it) and it actually makes trading more easy and cost effective.  Actually this article is for beginners in IT industry to understand the Equity trading infrastructure and not for the finance experts.

Before the IT system, all the shares were introduced in paper form and if someone wants to buy and sell shares it requires physical transfer of documents between two parties. Today enormous trade volume exist across various exchanges in various countries which makes physical document transfer practically impossible. Just imagine book keeping of these certificates then all exchanges or brokers firm should have multi-storey building only for paper storage. Now in this technology world there is no more physical certificates hence in the beginning stage of my career I always have a question how this electronic certificates are issued and someone has to do book keeping rite and also governing body to check the certificates else people will lose the trust. Who is responsible for this?????? Let me explain this later in this article.

I gave a hint on paper based stocks trading to explain how miserable those days for traders and investors. Let us assume you have share of XYZ Company and now you need to sell this share for best price to seller so that you can make profit. In the olden days it was very difficult because there is no centralized place and because of this reason Stock Exchange was invented. Earlier exchange acts as a place like market where buyers/sellers can meet and do their negotiation (trades). Now a new entity called Exchange is born in this world!!


Stock Exchange acts as a central place for investors to buy/sell their certificates. But it actually not served the exact needs for investors. For each buying/selling, an investor has to travel more than 200 to 1000 km means very tired and non-profitable business. Hence investor needs some middle man to interact with exchange on behalf of them so investors avoid their travel and time. Basically they are middleman between investor and exchange. Hence the concept of broker is born!!

Now as per the current participants trading world will look like below


In olden days, broker premises are nearby to exchange place along with huge number of members with phones/letter pads so that they can take orders from their clients and execute in exchange on behalf of their clients. Do you think all problem is solved? Answer is clearly no because still we need few more participants like Central counter party, book keeping authority etc. Let see in detailed manner.

Next participant I like to introduce is Custodian!! In the earlier days of my career I always try to understand their role but I am able to fully understand when I started my work in Shanghai-Hong Kong Stock Connect program.

Custodian is a person who will take care of your shares. Just assume, if you are in paper based trading world and now someone has to keep your shares safely in a locker to avoid tearing rite. Not only book keeping they also take care of shares during corporate action like dividend. Custodians are not like commercial banks they won’t do lending, personal accounts maintenance.  After introduction of custodians our trading world will look like below


Each and every broker will have link with Custodians for book keeping hereafter before opening account with broker kindly ask them because you need to know where your valuable shares are safely placed. Few institutional clients have their account with custodians because of that reason only in the above diagram I placed a link with buyer and custodian.

So now the trading world is having a place to trade and a place to safely keep the shares. Just assume the paper based world, you have XYZ share now wants to sell so you make a call to your broker and in turn he will go to exchange on behalf of you check the best price and execute the trade with buyers broker. Then seller’s broker will inform the custodian to transfer the shares to buyer’s custodian and in turn buyer has to transfer the cash as well. So now one person is still missing because how seller can trust some third person for timely delivery of the amount and also buyer as well. If anyone (Buyer or Seller) is fraudulent then trade becomes invalid hence someone has to supervise these various entities and acts as central responsible person for delivery versus payment of shares. Hence one more new entity born in this trading world and that person act as a Central counter party for the executed trades. Here only clearing and settlement process will start and in the finance world this is the critical function(back office or post trade activities)


Clearing house will act as a central counter party i.e. once trade gets executed in Stock Exchange trades will be moved into clearing house and they will be responsible for buyers and sellers. Basically they will enter into obligation with buyer side for timely settlement of their shares and also they will enter into obligation with seller for settlement of their money. Now buyer don’t have any risk and also seller because Clearing house is taking the risk on behalf of them. If either buyer or seller not able to proceed the trade means then Clearing house will use his own pool of money/shares for settlement. Hence clearing is always risky business in security world and there are strict rules and regulation for becoming clearing member (more trading members in the world right now but less clearing member). In other words clearing house will becomes like a governing body for settling the trades in a timely manner (T+3 or T+2 depends on the country financial infrastructure).

Now if we see in our trading world there is trading place, book keeping place, risk governing council  but still one important entity is missing. Earlier I told about dividend and its taken care by custodians but how company will come to know these are the persons holding my shares and they are eligible for dividend amount. Will they go and check each and every custodian or they will come to exchange to enquire about this. Answer is strictly no then who is doing this activity?  A new entity needs to be introduced called “Registrar”.


Registrar receives information from  new entity called Central Security Depository (CSD). A central securities depository (CSD) is a specialist financial organization holding securities such as shares either in certificated or non-certificated (de-materialized) form so that ownership can be easily transferred through a book entry rather than the transfer of physical certificates. Earlier we talked about custodians for book keeping if buyer and seller belong to different custodian then there is governing council to monitor the transfer of shares that governing council is CSD. Registrar will get the information from CSD for company’s book keeping.

This marks the end of my post.

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Bloomberg EMS Integration – OMS

Order Management system(OMS) is the heart of front office system for any financial institutions. I got a  chance to build/design it for a leading financial institution. Prior to this implementation I had only basic knowledge on how share trading works but no idea on OMS implementation. Actually this project helped me to gain knowledge on FIX protocol and how to build real time connectivity with external Execution Management System (EMS). Execution management system which I am referring is Bloomberg EMSX and this is the first execution management system which I worked and after that I came to know lot of EMS like Charles River, POEMS etc.

Without any prior knowledge on FIX protocol I started to explore that protocol and within two week I got basic idea of that protocol (any developers with passion can learn any new technology within two weeks). After getting basic idea in protocol I started to explore FIX engine and first engine I explored is NYSE TCM FIX engine. Within a week using vendor docs I learned to troubleshoot FIX engine, deployment and configuration for performance tuning. Then my next step is to build FIX messages for my order management system( order creation, ack, mod, cancel). Successfully this implementation went live after many late nights !!

This EMS integration is one of my favorite area because I worked for the entire end to end design along with network team and FIX protocol connectivity. Let me explain the details clearly so that it will help someone for future implementation.

In terms of Bloomberg connectivity for EMSX there are always two types

1. Staging session

2. Drop copy session

Let me explain EMSX. It is Bloomberg trading platform where lot of brokers are available for electronic order routing and execution. For further info please check Bloomberg site.

Staging session:

If someone wants to push orders from their internal OMS they have to use this staging session. Staging session is useful in financial institutions especially after the internal compliance and credit check. If they want to route orders to external EMSX means they can use this.

Drop Copy session:

This is more useful for back office functions but actually my design is slightly different even the front office functions is also automated using this. Drop copy session is nothing but a copy of all the actions done by trader done in EMSX. Usually leading banks use drop copy function for automating the back office functions like trade reconciliation and allocation.

After successful implementation in Equity, same infrastructure set up  config is automated for fixed income desk. I got one more opportunity to explore the FIXED INCOME (FX bonds, Zero Coupon bonds, Coupon bonds etc).

If anyone have any doubts on FIX integration with EMS or drop copy design consideration please let me know. I am very much happy to help

Regards, Shankar

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