This document is issued by the member of the national stock exchange of India (hereinafter referred to as “NSE”)/ Bombay stock exchange limited ( hereinafter referred to as “BSE”) / MCX Stock exchange limited(hereinafter referred to as “MCX-SX”)which has been formulated by the Exchange in coordination with the Securities & Exchange Board of India( hereinafter referred to as “SEBI”) and contains important information on trading in Equities / F&O / Currency Derivatives Segment of NSE/BSE/MCX-SX. All prospective constituents should read this document before trading in Equities / Equities / F&O / Currency Derivatives Segment of the Exchange.
NSE/BSE/MCX-SX/SEBI does neither singly or jointly and expressly nor impliedly guarantee nor make any representation concerning the completeness, the adequacy and accuracy of this disclosure document nor has NSE/BSE/MCX-SX/SEBI endorsed or passed any merits of participating in the trading segments.
This brief statement does not disclose all the risk and other significant aspect of trading.
In the light of the risks involved, you should undertake transaction only if you can understand the nature of the contractual relationship into which you are entering & the extent of your exposure to risk.
You must know and appreciate that trading in Equity share, F&O contracts, Currency derivatives contracts or other instruments traded on the Stock Exchange, which have varying elements of risk, is generally not an appropriate avenue for someone of limited resources / limited investment and/or trading experience and low risk tolerance. You should therefore carefully consider such trading is suitable for you.in the light of your financial condition. In case you trade on NSE/BSE/MCX-SX or suffer adverse consequences or loss, you shall be solely responsible for the same & NSE/BSE/MCX-SX, its clearing corporation / house and/or SEBI shall be responsible, in any manner whatsoever, for the same and it will not be open for you to take a plea that no adequate disclosure regarding the risk involved was made for or that you were not explained the full risk involved by the concerned members. The constituent shall be solely responsible for the consequences and no contract can be rescinded on that account. You must acknowledge and accept that there cannot be any guarantee of profits or no exception from losses while executing orders for purchase and/or sale of a currency derivatives contract being traded on NSE/BSE/MCX-SX.
It must be clearly understood by you that your dealings on NSE/BSE/MCX-SX through a member shall be subject to your fulfilling certain formalities set out by the members, which may inter alia include your filling the know your client form, client registration form, execution of an agreement etc. and are subject to the rules , byelaws and regulations of NSE/BSE/MCX-SX and its clearing corporation / house, guidelines prescribed by the SEBI and in force from time to time and circulars as may be issued by NSE/BSE/MCX-SX or its clearing corporation/ house and in force from time to time.
NSE/BSE/MCX-SX does not provide or purpose to provide any advice and shall not be liable to any person who enters into any business relationship with any trading member of NSE/BSE/MCX-SX and/or any third party based on any information contained in this document Any information contained in this document must not be construed as business advice. No consideration to trade should be made without thoroughly understanding & reviewing the risks involved in such trading. If you are unsure, you must seek to professional advice on the same.
In considering whether to trade or authorize someone to trade for you, you should be aware of or must get acquaint with the following:
- BASIC RISKS
- Risk of higher volatility :Volatility refer to the dynamic changes in price that a security / F&O contract / Currency derivatives contract undergoes when trading activity constitutes on the Stock Exchange . Generally, higher the volatility of a security / F&O contracts / currency derivatives contract, greater is its price swings. There may be normally greater volatility in thinly traded securities / F&O contracts / currency derivatives contract than in active securities / F&O contracts / currency derivatives contract. As a result of volatility, your order may be partially executed or not executed at all, or the price at which your order got executed may be substantially different from the last traded price or change substantially thereafter, resulting in notional or real losses.
- Risk of Lower Liquidity:
- Liquidity refer to the ability of market participants to buy and/or sell securities securities / F&O contracts / currency derivatives contracts expeditiously at a competitive price and with minimal price difference. Generally, it is assumed that more the numbers of orders available in a market, greater is the liquidity. Liquidity is important because with greater liquidity, it is easier for investor to buy and/or sell securities / F&O contracts / currency derivatives contracts swiftly and with minimal price difference, and as a result, investor are more likely to pay or receive a competitive price for securities / F&O contracts / currency derivatives contract. As a result, your order may be partially executed, or may be executed with relatively greater price or may not be executed at all.
- Buying or selling securities / F&O contracts / currency derivatives contracts as part of a day trading strategy may also result into losses, because in such a situation, securities / F&O contracts / currency derivatives contracts may have to be sold / purchased at low / high prices, compared to the expected price levels, so as not to have any open position or obligation to deliver or receive a securities / F&O contracts / currency derivatives contracts.
- Risk of wider spreads: Spreads refer to the difference in best buy price & best sell price. It represents the differential between the price of buying a securities / F&O contracts / currency derivatives contract and immediately selling it or vice versa. Lower liquidity & higher volatility may result in wider than normal spreads for less liquid pr illiquid securities / F&O contracts / currency derivatives contracts. This in turn hampers better price formation.
- Risk-reducing orders: The placing of orders (e.g. “stop loss” orders, or “limit” orders) which are intended to limit losses to certain amounts may not effective many a time because rapid movement in market condition may make it impossible to execute such orders.
- A “market” order executed promptly, subject to availability of orders on opposite side, without regard to price and that, while the customer may receive a prompt execution of market of “market” orders, the execution may be at available price of outstanding orders, which satisfy the order quantity, on price time priority. It may be understood that these prices may be significantly different from the last traded price or the best traded price in that securities / F&O contracts / currency derivatives contract.
- A “limit” order may be executed only at the “limit” price specified for the order or a better price. However while the customer receives price protection, there is a possibility that the order may not be executed at all.
- A stop order is placed “away“ from the current price of a stock / F&O contracts / currency derivatives contract, and such order get activated if and when the securities / F&O contracts / currency derivatives contract reaches, or trades through, the stop price. Sell stop orders are entered ordinarily below the current price, buy stop orders are entered ordinarily above the current price. when the securities / F&O contracts / currency derivatives reaches the pre- determined price , or trades through such price, the stop loss orders convert to a market/limit orders and is executed at the limit or better. There is no assurance therefore limit orders will be executable since securities / F&O contracts / currency derivatives might penetrate the pre-determined price, in such case the risk of such orders not getting executed arise, just as with a regular limit order.
- Risk of News Announcement: News Announcements that may impact the price of stock / F&O contracts / currency derivatives contracts may occur during trading, and when combined with lower liquidity and higher volatility, may suddenly cause an unexpected positive or negative movement in the price of security / contracts.
- Risk of Rumours: Rumer about companies / currencies at times float in the market through word of mouth, newspapers, websites or news agencies etc. the investors should be wary of and should desist from acting on rumors.
- System Risk:High volume trading will frequently occur at the market opening & before market close. Such high volumes may also occur at any point in day. These may cause delays in orders execution or confirmation.
- During the periods of volatility, on account of market participants continuously modifying their order quantity or prices or placing fresh orders, there may be delays in order execution & its confirmations.
1.7.2 Under certain market conditions, it may be difficult or impossible to liquidate a position in the market at a reasonable price or at all, when there are no outstanding orders either on the buy side or the sell side, or trading is halted in a securities / F&O contracts / currency derivatives contracts due to any action on account of unusual training activity or securities / F&O contracts / currency derivatives hitting circuit filters or for any other reason. - 1.8 System / network Congestion:Trading on NSE/BSE/MCX-SX is in electronic mode , based on satellite / leased line based communications , combination of technologies and computer systems to place and route orders . Thus , there exist a possibility of communication failure or system problem or slow or delayed response from system or trading halt , or any such other problem / glitch whereby not being able to establish access to the trading system / network , which may be beyond control may result in delay in processing buy or sell orders either in part or in full . You are cautioned to note that although these problems may be temporary in nature, but when you have outstanding open position or unexpected orders, these represents a risk because of your obligation to settle all executed transactions
- As far as Futures & Option segment & Currency Derivatives Segment are concerned, please note & get yourself acquainted with the following additional feature:-
- Effect of “Leverage” or “Gearing” :In the derivatives market, the amount of margin is small relative to the value of the derivatives contract so the transactions are ‘leverage’ or ‘geared‘ .Derivatives trading, which is conducted with a relatively small amount of margin, provides the possibility of great profit or loss in comparison with the margin amount. But transactions in derivatives carry a high degree of risk.
You should therefore completely understand the following statements before actually trading in derivatives and also trade with caution while taking into account ones circumstances, financial resources etc. If the prices move against you may loss a part of or whole margin amount in a relatively short period of time. Moreover, the loss may exceed the original margin amount.- Futures trading involve daily settlement of all positions. Every day the open positions are marked to market based to the closing level of the index / F&O contract / Currency derivatives contract. If the contract has move against you, you will be required to deposit the amount of loss (notional) resulting from such movement. This amount will have to be paid within a stipulated time frame, generally before commencement of trading on the next day.
- If you fail to deposit, the additional amount by the deadline or if an outstanding debts occurs in your account the broker/member may liquidate a part of or the whole position or substitute securities. In this case you will be liable for any losses incurred due to such close outs.
- Under certain market conditions, an investor may find it difficult or impossible to execute transactions. For example, this situation can occur due to factors such as illiquidity i.e. there is insufficient bids or offers suspension of trading due to price limit or circuit breakers etc.
- In order to maintain market stability, the following steps may be adopted: changes in the margin rate increase in the cash margin rate or others. These new measures may also be applied to the existing open interests. In such condition, you will be required to put up additional margins or reduce your positions.
- You must ask to your broker to provide the full details of F&O contracts / currency derivatives contracts you plan to trade i.e. the contract specification & association obligations.
- Currency specific risks:
- The profit or loss in transactions in foreign currency- denominated contracts, whether they are traded in your own or other jurisdiction , will be affected by fluctuation in the currency rates where there is a need to convert from the currency denomination of the contract to another currency.
- Under certain market condition, you may find it difficult or impossible to liquidate a position. This can occur for example, when the currency is deregulated or fixed trading brands are widened.
- Currency prices are high volatile. price movements for currencies are influenced by, among other things : changing supply demand relationship ; trade , fiscal , monetary, exchange control programs & policies of government ; foreign political & economic events & policies ; changes in national & international interest rates & inflation ; currency devaluation ; and estimate of market place . None of these factors can be controlled by any individual advisor and no assurance can be given that an advisor’s advice will result in profitable traders for a participating customer or that a customer will not incur losses from such events.
- Risk of Option holders
- An option holder runs the risk of losing the entire amount paid for the option in a relatively short period of time. This risk reflects the nature of an option as a wasting asset which becomes worthless when it expires. An option holder who neither sells his option in the secondary market nor exercises it prior to its expiration will necessarily lose his entire in the option . If the price of the underlying does not change in the anticipated direction before the option expires to an extent sufficient to cover the cost of the option the investor may lose all or a significant part of his investment in the option.
- The Exchange may impose exercise restrictions and have absolute authority to restrict the exercise of options at certain times in specified circumstances.
- Risks of option writers:
- If the price movement of underlying is not in the anticipated direction, the option writer runs the risks of losing substantial amount.
- The risk of being an option writer may be reduced by the purchase of other options on the same underlying interest and thereby assuming a spread position or by acquiring other types of hedging positions in the option markets or other markets. However, even where the writer has assumed a spread or hedging position, the risk may still be significant. a spread position is not necessarily less risky than a simple ‘long’ or ‘short’ position .
- Transaction that involve buying & writing multiple options in combination, or buying or writing options in combination with buying or selling short the underlying interests, present additional risk to investors. Combination transaction, such as option spreads, is more complex than buying or writing a single option. And it should be noted that, as in any area of investing, a complexity not well understood is, in itself , a risk factor .this not to suggest that combination strategies should not be considered , it is advisable as is the case with all investments in options to consult who is experienced and knowledgeable with respect to the risks and potential rewards of combination transactions under various market circumstances .
- Effect of “Leverage” or “Gearing” :In the derivatives market, the amount of margin is small relative to the value of the derivatives contract so the transactions are ‘leverage’ or ‘geared‘ .Derivatives trading, which is conducted with a relatively small amount of margin, provides the possibility of great profit or loss in comparison with the margin amount. But transactions in derivatives carry a high degree of risk.
3. GENERAL:
- Commission & other charges
Before you begin to trade, you should obtain a clear of all commission, fees and other charges for which you will be liable. These charges will affect your net profit (if any) or increase your loss. - Deposited cash and property
You should familiarize yourself with the protections accorded to the money or other property you deposit particularly in the event of a firm insolvency or bankruptcy. The extent to which you may recover your money or property may be governed by specific legislation or local rules. In some jurisdiction, property which has been specifically identifiable as your own will be pro-rated in the same manner as cash for purpose of distribution in the event of a shortfall. in case of any disputes with the member , the same shall be subject to arbitration as per the byelaws/ regulations of the Exchange. - For rights and obligations of the clients, please to annexture-1 enclosed with this document.
- The term ‘constituents’ shall mean and include a client , a customer or an investor , who deals with a member for the purpose of acquiring and/or selling of currency derivatives contracts through the mechanism provided by NSE/BSE/MCX-SX.
- The term ‘member’ shall mean and include a trading member , a broker or a stock broker , who has been admitted as such by NSE/BSE/MCX-SX and who holds a registration certificate from SEBI .