Auction Process in Indian Markets/Security Shortages Handling at BSE and NSE

A buying-in auction is conducted for the security shortages on the day after the pay-out day through NSE/BSE trading system i.e. on T+3 day. An Auction Tender Notice is issued to the Members informing them about the names of the securities short or not delivered, quantity slated for auction and the date and time of the auction session.

The session is open on BSE between 11:00 a.m. and 12 noon for all the scrips under Compulsory Rolling Settlements except those in "Z" group and scrips on "trade to trade" basis (T group scrips) which are directly closed-out. The Members, who participate in the auction session, can download the Delivery Orders in respect of the auction obligations on the same day, if their offers are accepted. The Members are required to deliver the shares in the Clearing House on the auction Pay-in day, i.e. T+4. Pay-out of auction shares and funds is also done on the same day, i.e., T+4.

On NSE the auction is carried out on T+3 rd day and auction settlement happens on T+5th day.

Auction is carried out in the following two cases

Short deliveries
Bad deliveries

Short Deliveries: If a member is not able to deliver securities on the day of pay-in then it is considered as Short delivery. It happens when a speculator who sells shares that he doesn’t own (short selling) fails to square up his transaction within a trading cycle.

Bad Delivery: Bad delivery exists only in the case of physical share transfers. It doesn’t exist in de-mat form of securities. If a physical transfer deed is torn, mutilated, overwritten, defaced, or if there are spelling mistakes in the name of the company or the transfer then it is considered as bad delivery.

Clearing agency identifies members who are fully/partially short of securities delivery on securities pay-in day and debits their account by an amount calculated at the valuation price. The valuation price is the closing price of the security on the preceding trading day of securities pay-in day. Read more

August 17, 2008 | Filed Under Stocks | Leave a Comment

Auction Participants in Indian Markets

All brokers/trading members can participate in an auction. Clearing corporation prepares a list of short securities and sends it across all brokers/trading members who participate in the trading session on the day of Auction and place orders. A broker can place the orders of his own or his clients’ orders. A Member who has failed to deliver the securities of a particular company on the pay-in day is not allowed to offer the same in auction.

The following are different auction participants.

Initiator: The trading member who initiates the Auction. The initiator can give quotes either for buy or for sell order.

Competitor: The auction participant who quotes the orders on the same side of the initiator i.e. if the initiator gives bid quotes (buy order) then competitor also gives bid quotes.

Solicitor: The trading member who quotes the orders on the other side of the initiator i.e. if the initiator gives bid quotes (buy order) then competitor gives offer quotes (sell order).

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Security Shortages - Close-out procedures at NSE

If the securities are not bought in the auction session (if there are no sellers even in the auction) they are deemed closed out at the highest price between the first day of the trading period till the day of squaring off or 20% greater than the official close price on the close out day, whichever is higher. This amount is credited to the receiving member’s account on the auction pay-out day and charged to the default broker who passes these charges on to the concerned client.

In case of auction non-delivery i.e. the auction seller fails to deliver the securities on the day of pay-in day the deal will be squared up at the highest price on the NSE from the first day of the relevant trading period to the close out day or 20% greater than the official close price on the close out day, whichever is higher. The auction seller will have to pay this amount.

In case of auction bad-delivery i.e. the auction securities delivery reported as bad delivery the deal will be squared up at the highest price on the NSE from the first day of the relevant trading period to the close out day or 10% greater than the official close price on the close out day, whichever is higher. The auction seller will have to pay this amount.

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Security Shortages - Close-out procedures at BSE

In BSE the close out procedures varies from group to group. There won’t be any auction for Z group, TS group and T group shares and are settled at a price whichever is higher in the following.

The highest rate of the scrip from the day of trading to the day prior to the day of auction of the respective settlements
10% above the closing rate as on the day prior to the day of auction/ close out of the respective settlement.

The settlement in ‘A’, ‘B’, ‘S’ and ‘F’ groups are done at a price whichever is higher in the following if the securities are not bought in auction or auction seller fails to deliver the securities on the day of auction pay-in. In first case the seller broker is charged and in second case the auction seller’s account is debited.

The highest rate of the scrip from the trading day to the day prior to the day on which the auction is conducted for the respective settlement.20% above the closing rate as on the day prior to the day of auction/close out of the respective settlement.

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Handling Funds Shortages in Trading and Settlement

The trading and/or clearing facility of the members will be withdrawn if they fail to fulfill their funds obligations. This applies to valuation debit as well i.e. the amount to be debited from the members’ account as an initial amount towards short fall of securities on the pay-in day. Further, securities pay-out, due to such clearing member shall also be withheld.

The above provisions shall apply if net cumulative fund shortage for a member is:
1. Equal to or greater than Rs. Five (5) lakhs at the end of pay-in.
2. Equal to or greater than Rs. Two (2) lakhs for six (6) or more occasions in the last three (3) months on any given day.

In case, the member is disabled on account of (2) above, on making good the shortage amount, the member shall be permitted to trade subject to its providing a deposit equivalent to its cumulative funds shortage as the ‘funds shortage collateral’. Such deposit shall be kept with the Clearing Corporation for a period of ten settlements and shall be released only if no further funds shortages are reported for the member in next ten consecutive settlements. Members may further note that there shall not be any margin benefit or any interest payment on the amount so deposited as ‘funds shortage collateral’. Read more

August 17, 2008 | Filed Under Stocks | Leave a Comment