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AN INTERNSHIP REPORT
ON ORGANISATION STUDY
& STUDY ON “t+1 settlement cycle”
AT MOTILAL OSWAL SECURITIES
A Report submitted to MPBIM Bangalore in partial fulfillment of the requirement for the award of
MASTER OF BUSINESS ADMINISTRATION (MBA) BANGALORE UNIVERSITY
By
PRIYADARSHINI .R O6XQCM6033
Under the Guidance and Supervision
Of
B.Srinivasan Mr. Shivanna T. R. Professor Branch Manager MPBIM Motilal Oswal Securities Shantinagar, Bangalore
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DECLARATION
I hereby declare that this report titled, “AN INTERNSHIP REPORT ON
ORGANIZATIONAL STUDY AT MOTILAL OSWAL SECURITIES”
is a record of independent work carried out by me, towards the partial
fulfillment of Master of Business Administration (MBA) program of
Bangalore University at M. P. Birla Institute of Management. This is my
original work and has not been submitted for the award of any other degree,
diploma, fellowship or other similar title or prizes.
Place: Bangalore PRIYADARSHINI.R
Date: 06XQCM6063
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PRINCIPAL’S CERTIFICATE This is to certify that the internship report titled, “AN INTERNSHIP
REPORT ON ORGANIZATIONAL STUDY AT MOTILAL OSWAL
SECURITIES” has been prepared by Ms. PRIYADARSHINI.R, bearing
registration number 06XQCM6063, under the guidance of Prof.
SRINIVASAN, M P Birla Institute Of Management, Associate Bhartiya
Vidya Bhavan, Bangalore.
Place: Bangalore Principal
Date: Dr. N.S.Mallavalli
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GUIDE’S CERTIFICATE
This is to certify that the internship Report entitled, “AN INTERNSHIP
REPORT ON ORGANIZATIONAL STUDY AT MOTILAL OSWAL
SECURITIES” done by Ms. PRIYADARSHINI.R bearing Registration
No.06XQCM6063 is a bonafide work done under my guidance in a partial
fulfillment of the requirement for the award of MBA degree by Bangalore
University. To the best of my knowledge this report has not formed the basis
for the award of any other degree.
Place: Bangalore Prof B.SRINIVASAN Date: (internal guide)
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ACKNOWLEGDEMENT
This is the moment, which gives me opportunity to thanks everyone who has
contributed in my practical training at MOTILAL OSWAL SECURITY
LTD, as part of my study.
First of all I would like to express my gratitude to beloved principal for
boosting moral during the training period. I would like to express my sincere
thanks to Prof. B.SRINIVASAN (internal guide) for helping me in various
aspects the study.
I am deeply indebted to Mr. SHIVANNA T. R. (Br. Manager, MOSt,
Shanthinagar) for giving me an opportunity and guidance, invaluable help
and cooperation to successfully complete the project.
I am grateful to Mr. VIJAY KUMAR (Business Development Manager,
Most) for his help and cooperation. I am very thankful to the management
and staff of Motilal Oswal securities for their invaluable cooperation during
my study.
Last but not the least I would like to express my profound gratitude to my
family and friends who have indirectly encouraged me in completing this
study.
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PART:A
Chapter no. Topic particulars Page
no
DECLARATION 2
PRINCIPAL’S CERTIFICATE 3
GUIDE’S CERTIFICATE 4
EXTERNAL GUIDE’S CERTIFICATE 5
ACKNOWLEDGEMENT 6
Chapter:1
Organizational
study
Executive summary 12
Brief profile about organisation 14
MOSt history 16
People behind the organisation 17
MOSt shareholding pattern 19
MOSt management 21
Milestones 22
Location matrix 30
MOSt vision 31
MOSt guiding principles 32
Investment philosophy 33
Management team 34
Wealth creation study & awards 35
MOFSL customer & retail business 36
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MOSt research based advisory 36
products 41
Services � EAG � BUSINESS ASSOCIATE � E-BROKING � PORTFOLIO MANAGEMENT SERVICE 1. Bull’s Eye PMS 2. Value Hedging PMS � MUTUAL FUNDS � COMMODITIES
42
Chapter:2 Organizational Structure
organizational hierarchy 60
Chapter:3 Operational Aspects of Different Functional Department
Functional Departments � MARKETING � ACCOUNTS � HR & ADMINISTRATION � SUPPORT & FUNCTION � ADVISORY SERVICES
63
Chapter:4 Performance Evaluation
SWOT ANALYSIS 67
Chapter:5 Problem Areas Observed
Findings 72
Chapter:6 Recommendations Recommendations 76
Chapter:7 Conclusion Conclusion 79
BIBILOGRAPHY
PART :B
A Microscopic Study On t+1 settlement cycle
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Chapter: 1
Organisation Profile
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Motilal Oswal Financial Services Ltd
Motilal Oswal Financial Services Ltd consists of four companies.
Motilal Oswal Investment Advisors Pvt. Ltd. is our Investment Banking
arm with collective experience of over 100 years in investment
banking/corporate banking and advisory services
Motilal Oswal Commodities Broker (P) Ltd. has been providing
commodity trading facilities and related products and services since 2004.
Motilal Oswal Venture Capital Advisors Private Limited has launched
the India Business Excellence Fund (IBEF), a US$100 mn India focused
Private Equity Fund.
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Motilal Oswal Securities Ltd. (MOSt) our services include equities,
derivatives, e-broking, portfolio management, mutual funds, commodities,
IPOs and depository services.
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Motilal Oswal Securities Ltd.
An Executive Summary
MOFSL strongly believes in Buffett's following two principles,
Rule 1: Never lose money.
Rule 2: Never forget rule one.
Motilal Oswal Securities is a leading research and advisory based stock
broking house of India, with a dominant position in both institutional and
retail broking. Asia money Brokers Poll 2005 has ranked them the best
Indian brokerage firm. There are various other categories where they have
been rated number one - most independent research, sales and service etc by
the Brokers Poll.
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For a more unbiased opinion, in March 2006, AQ Research (a UK-based
firm that analyses the accuracy of a broker’s research call) declared Motilal
Oswal the best research house for Indian stocks.
Motilal Oswal Securities has witnessed rapid organic growth due to
favorable market conditions as well as efforts put in by the company itself.
FY05 and FY06 saw the company grow inorganically through acquisition of
three significant regional broking firms from Karnataka, Kerala and U.P.
Over a period of time many more regional broking firms may be acquired to
gain solid footing in various regions of India.
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Brief profile about organization:
Introduction:
The company was founded in 1987 as a small sub-broking unit, with just
two people running the show. Focus on customer-first-attitude, ethical and
transparent business practices, respect for professionalism, research-based
value investing and implementation of cutting-edge technology have enabled
us to blossom into an almost two thousand-member team.
Our institutional business unit has relationships with several leading foreign
institutional investors (FIIs) in the US, UK, Hong Kong and Singapore. In a
recent media report we were rated as one of the top- 10 brokers in terms of
business transacted for FIIs.
The retail business unit provides equity investment solutions to more than
200000 investors through 1160 outlets spanning over 363 cities. These
solutions are provided by a force of over 2000 employees and over 780
Business Associates. We provide advice-based broking (equities and
derivatives), portfolio management services (PMS), e-Broking, depository
services, commodities trading, IPO and mutual fund investment advisory
services.
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Our Value PMS Scheme gave a 402.74% return since inception (Feb 2003)
(Sensex is 270.69% & Nifty is 245.11%). The performance of Value
Hedging since inception (Oct 2005) is 32.76%.
Such an outstanding performance can be only attributed to our single-indeed
focus on research-based value investing. Motilal Oswal Securities invests
almost 5-10% of its revenue on equity research and hires and trains the best
resources to become advisors to its valued clients.
Our unique Wealth Creation Study, authored by Mr. Raamdeo Agrawal,
Managing Director, is now in its eleventh year. Investors keenly await this
annual study for the wealth of information it has on how companies created
wealth during the preceding five years.
The organization finds its strength in its team of young, talented and
confident individuals. Qualified professionals carry out different functions
under the able leadership of its promoters, Mr. Motilal Oswal and Mr.
Raamdeo Agrawal. Stringent employee selection process, focus on
continuous training and adoption of best management practices drive the
quest to achieving there Vision.
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Motilal Oswal Securities Ltd (MOSt) History:
The story of MOSt goes back many years, when Mr. Motilal Oswal and Mr.
Raamdeo Agrawal met each other as students in a Mumbai suburban
hostel in the early eighties. Both the young chartered accountants hailing
from a rural & an unpretentious background had a common dream viz'to
build a professional organization with strong value systems, to provide
reliable & honest investment advice to investors'. Thus was born their first
enterprise called "Prudential Portfolio Services" in 1987.
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People behind the organization:
Mr. Motilal Oswal
Chairman and Managing Director
Mr. Motilal Oswal is the promoter of Motilal Oswal Securities Ltd. He is a
member of Institute of Chartered Accountants of India and started the
business along with the co-promoter Mr. Raamdeo Agarwal in 1987.
“Service is required in everything, in research, in execution and in
settlement. It is going to be the key to survival. If you give good service and
value to your clients, it will translate into good business”
He has received the Rashtriya Samman Patra awarded by the Government
of India for being amongst the top 50 income tax payers in the country. He
was elected as a Director of BSE and joined its governing board in 1998. He
is currently a member of various committees of CDSIL and SEBI. He is
currently a member of the NSE committee for F&O and a member of the
Managing Committee of Indian Merchant Chambers.
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Mr. Raamdeo Agrawal
JMD MOSt & portfolio
Profile of Raamdeo Agrawal
Date of Birth: 5th April 1957 Educational Qualification: Chartered Accountant Achievements: - Co-Author of the book "CORPORATE NUMBERS GAME" in 1986 Joint Managing Director of Motilal Oswal Securities Ltd Author of annual "Wealth Creation Study * "
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MOFS Shareholding pattern:
1st Qtr: Promoters & Promoter group [78.67%]
2nd Qtr: Directors and employees [11.85%]
3rd Qtr: New Vernon Private Equity Limited [7.20%]
4th Qtr: Bessemer Venture Partners Trust [2.27%]
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Top ten shareholders as on the date of filing of the Draft Red Herring Prospectus with SEBI:
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MOSt Management
Name Designation Qualification
Mr. Motilal Oswal Chairman and
Managing Director
B. Com, CA
Mr. Raamedeo
Agrawal
Joint Managing
Director
B. Com, CA
Mr. Navin Agarwal Director B.Com CA, CS, ICWA, CFA
Mr. Hitungshu
Debnath
Director - Retail
Business
Post Graduation in Marketing Management
Mr. Ashutosh
Maheshvari
CEO - MOIA B.tech.(IIT-k),MBA
Mr. Vishal Tulsyan CEO - MOVC B. Com, CA
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Milestones:
2007
Mr. Motilal Oswal - Chairman and Managing Director has been
appointed as a member of the Managing Committee of Indian Merchant
Chambers.
Motilal Oswal Financial Services Ltd files for an IPO
Motilal Oswal Financial Services Ltd. features as a case study in Harvard
Business School
Motilal Oswal Financial Services Ltd ties up with Punjab National Bank
to offer online trading to its customers
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2006
Places 9.29% with two leading private equity investors – New Vernon
Private Equity Limited and Bessemer Venture Partners
Issues 14% of companies equity to employees as ESOPs
Acquires a leading south Indian brokerage firm – Peninsula Capital
Markets
Enters Private Equity and plans entry into Investment Banking
businesses
Value PMS gives 390% returns to its investors between Feb 2003 and
March 2006
Re launches its e-Broking service through a nationwide campaign.
First advice-based online trading proposition in the Indian markets
Another milestone in distribution - 1017 outlets, 375 cities, serving
1.61 lakh clients
Has a 1400 member team working to achieve the company's vision.
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2005:
Asia money Brokers Poll 2005 rates Motilal Oswal Securities - Best
Local Brokerage, Most Independent Research House, Best in Sales
and Service
Launches two new Portfolio Management Schemes - Value
Hedging for derivatives and Discover Value for the Rs5 lakh to Rs50
lakh category
Acquires local brokerage Gayatri Capitals from Andhra Pradesh and
Varghese from Bangalore
Deepest distribution in the stock broking segment with 700 outlets in
320 cities and 1.2 lakh clients
2004:
Presence expanded to 270 outlets in 150 cities and 20 states
Value PMS delivers a whopping 160% post tax returns for the period
ended April 2004
Bulls Eye PMS - A momentum based PMS launched
Start of the Solid Research Solid Advice campaign
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2003:
MOSt Portfolio Management Services launched with Mr. Raamdeo
Agrawal as the Portfolio Manager. Uniquely structured performance
related fees.
Inquire team is successful in capturing the uptrend in Banking, Auto
and Infrastructure sectors.
15,000 Depository clients acquired.
9 own branches setup at 7 cities to provide Equity Advisory Services.
More in the pipeline.
150 outlets in 110 cities across 18 states & one Union Territory in
India manned by 1000 people servicing over 15,000 Retail and
Institutional Investors.
2002:
Mr. Navin Agarwal, Head of Equity Research & Institutional sales, is
inducted in the Board of Directors
MOSt consolidates its retail operations & upgrades its IT / Back
Office infrastructure to cater to its growing network of branches,
Franchisees and Channel Partners.
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Retail network completes coverage of 100 cities in India. Direct
servicing of HNI clients is initiated.10,000 Depository clients
acquired.
2001:
Legendary marketing guru Shunu Sin’s services taken to revitalise
retail marketing strategy and branding efforts.
Starts offering Derivatives products and advisory services on both
BSE as well as NSE
2000:
Both Mr. Motilal Oswal and Mr. Raamdeo Agrawal receive Rashtriya
Samman Patra from Central Board of Direct Taxes for being amongst
the top 50 tax payers in India from FY94-FY98
Acquires its 100th Franchisee / Channel Partner and emerges as a
leading player in the Indian Broking Sector
Becomes a Depository Participant of Central Depository Services
Limited (CDSIL)
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1999:
Mr. Raamdeo Agrawal starts attending legendary billionaire investor
Warren Buffett’s Annual General Meetings of Berkshire Hathway Inc.
He still continues to attend it every year.
The Wealth Creation Study started in 1996 culminates into Wealth
Creation Seminar and Awards function in 1998.
First Stock Broking house to brand its services as a research and advice
based broker.
“Wealth Creation” Campaign started.
www.MotilalOswal.com launched. First broking house in India to go on
the web.
Becomes a Depository Participant of National Securities Depository
Limited (NSDL).
Inducts Mr. Ivan Mathias, former country head of Watson Wyatt
Worldwide, on its Board to Directors to shape HR initiatives.
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1998:
Mr. Motilal Oswal joins the Governing Board of The Stock
Exchange, Mumbai.
1996:
Wealth Creation Study started. First of its kind study initiated to
identify biggest and fastest wealth creating companies in Indian Stock
markets.
1995:
Motilal Oswal gets incorporated as Motilal Oswal Securities Ltd.
1994:
MOSt acquires NSE Membership and plans for major expansion of its
retail network.
Inquire (Indian Equity Research) is formally created at a 2500 sq. ft
office in South Mumbai with bigger and better quality infrastructure
than the corporate office. Since then nearly 20% of revenue is
allocated to research. First Domestic Stock broking house to have
such a strong Research focus
.Motilal Oswal. enters Institutional Broking business
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1990:
After just three years in the business, “Motilal Oswal” is formed
through acquisition of membership on The Bombay Stock Exchange
(BSE). Three more memberships taken in later years.
1987:
Mr. Motilal Oswal and Mr. Raamdeo Agrawal lay the foundation of a
great partnership by starting a sub-broking firm. The venture stands
out from the rest due to their approach of Research-based broking
even when sub-brokers.
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LOCATION MATRIX
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MOST VISION
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Our Core Purpose:
To be a well respected and preferred global financial services organization
enabling wealth creation for all our customers.
Values: Integrity: A company honoring commitment with highest ethical and
business practices.
Team Work: Attaining goals collectively and collaboratively.
Meritocracy: Performance gets differentiated, recognized and rewarded in
an apolitical environment.
Passion & Attitude: High energy and self motivated with a “Do It” attitude
and entrepreneurial spirit.
Excellence in Execution: Time bound results within the framework of the
company’s value system
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Quintessential Investment Philosophy of MOSt
Emphasis on return on net worth
A focused approach to investing
Patience is an invaluable virtue
Pick high quality companies
Invest for the long term
Investing is the art of controlling emotions
Find good companies that are currently out of favour
Companies that generate sustainable cash flow are safer
If you make a mistake, admit it and get out
Look for sufficient 'margin of safety
Consistent portfolio returns over time lead to substantial wealth
creation
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Management Team
MOSt management team is regularly engaged in finding ways to improve
operational efficiencies and customer satisfaction. You will find CAs, CFAs,
ICWAs, CSs, MBAs and IT professionals managing crucial functions, to
bring you best products and services - from research & advice to trade
execution & settlement. At MOSt we practice meritocracy and each of the
team members is provided extensive training.
Training & Manpower Development
MOSt conducts various training and development programs regularly to
enhance the capabilities of its team. As much as 5% of the salary bill is spent
on such programs, which is amongst the highest for a broking organization
in India. MOSt is truly a learning organization with lead being taken by the
Directors, who regularly participate in top management learning programs
like Strategic Management Program at Indian School of Business,
Hyderabad, Strategy Summits with Management Gurus like Tom Peters and
Dr. Lester Thurow, Dean, Sloan School of Management, (MIT) and Brand
Management Seminar by Al Ries etc
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MOSt Wealth Creation Study and Awards function
MOSt Wealth Creation Study and Awards function has become a key event
in the Indian Capital Market. The Wealth Creation Study, initiated, in 1996
is widely appreciated in the investment community and the Indian Corporate
Sector. This annual study identifies the fastest and the biggest wealth
creators in the Indian markets over the last 5 years and felicitates them at a
public event, attended by several leading investors and equity specialists.
The 10th Wealth Creation Awards function was held at the Grand Hyatt,
Mumbai on Dec, 2005.
Foundation Day
Arising from its deep respect for Knowledge & Value Addition, MOSt
celebrates its Foundation Day in a truly unique manner. Not only are the top
performing team members and Business Partners rewarded for their
contributions, but they are also provided training on important subjects like
Customer Profiling, Selling, Investment Advising etc. Lot of learning takes
place through sharing of successful practices by MOSt Business Partners.
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Wealth Creation Seminars
MOSt conducts Wealth Creation Seminars across the country regularly to
educate individual investors about there research products, derivatives
market, investment strategies and latest opportunities in the stock markets.
There senior executives, research analysts and investment strategists address
the audience and personally interact with the investors.
End to End Equity Solutions
MOSt provides end-to-end equity solutions to all categories of its valued
clients by using a combination of its numerous products and services. It
offers world-class research-based investment and trading ideas coupled with
efficient and reliable trade execution & settlement. Its "default free" record
since inception is a unique and exceptional feature in the Indian Stock
Markets.
MOSt values client trust and is committed to upholding it at all costs. They
believe that no automated system can be a substitute for the human touch.
MOSt combines its Research, IT strengths, ethical business practices and
"Customer First Attitude " to provide end-to-end equity solutions.
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MOSt Business segments
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MOFSL Customer & reach Retail Business
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MOSt Research Based Advisory
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PRODUCTS:
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Services:
Depository Services
In the times of T+2 having a demat account linked to your trading account
becomes really convenient. The non-trading members also can avail of our
Depository services. You receive regular account reports and an efficient
service at all times. MOSt is a member of both NSDL and CDSL and the
service is available at all our outlets in India.
Depository Service Provided By MODES
Account Opening
Dematerialization
Rematerialization
Account Transfer
Transmission
Nomination
Pledging and Hypothecation
Account Closures
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Derivatives
Derivatives (Futures & Options) are ideal instruments to protect your
portfolio against risk. You can trade with index movements, hedge and
leverage your portfolio by limiting risk but keeping your upside unlimited.
Equity Research
Equity Research is an inherent strength of MOSt. MOSt believes in picking
investment opportunities where the underlying value is higher than the
market price. A feather in the cap, Asiamoney Brokers Poll 2005 has ranked
us the best Indian brokerage firm.
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MOSt EAG:
In keeping with its tradition of personalized service, Motilal Oswal
Securities Limited set up MOSt EAG to provide customized and integrated
equity solutions to High Networth Investors.
Equity Research is an inherent strength of MOSt. We believe in picking
investment opportunities where the underlying value is higher than the
market price.
Most EAG team has highly trained equity professionals, who act as your
Relationship Managers (RMs). Most RMs proactively helps you take
informed equity investment decisions and build a healthy portfolio.
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Client Profiling
MOSt RMs determines each EAG client's profile before deciding the ideal
asset allocation. Profiling takes into consideration issues like your attitude
towards risk, investment horizon, life stage, return expectation and
investment objectives
Investments & Trading:
MOSt RMs are experts in providing value based investment solutions as
well as advising you in positional trading, as per your profile.
Portfolio Tracking Software:
Client’s portfolio is continuously monitored using Portfolio Tracking
Software.
Integrated Approach:
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They use integrated approach in there investment strategy using a
combination of cash, derivatives and other leverage products to help client
reach there investment goal.
Benefits
MOSt EAG team has highly trained equity professionals, who act as client’s
Relationship Managers (RMs). MOSt RMs proactively help there client take
informed equity investment decisions and build a healthy portfolio. The
RMs keep a close watch on the performance of each stock in client’s
portfolio and suggest changes as and when there is a significant trend
reversal or deterioration in a company's performance. This is to help client
reach there investment goal. The RM doesn't stop at just that, he goes a step
further to ensure that client’s trades are settled and stocks credited in there
Demat account in a timely manner. This allows MOSt to give client’s a
convenient single window service and client’s RM becomes the single point
contact for all equities related matters.
Clients will receive regular portfolio valuation reports to enable them to
monitor performance and view the progress towards the investment
objective.
Clients can avail of there services from all there branches in Mumbai,
Ahmadabad, Bangalore, Chennai, Delhi, Hyderabad, Kochi, Kolkata, Surat,
Vadodra.
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BUSINESS ASSOCIATE
MOSt Business Associate
Motilal Oswal Securities Ltd. (MOSt) is arguably one of the best brands
among Indian Domestic broking houses enjoying an unmatched and
unparallel brand recall. Financially sound, with an excellent track record of
consistent market growth in all key business segments. MOSt is spread
across 24 states in 375 cities through 300 Business Associates and 52
branches.
To reach out to more investors across India, MOSt builds partnership with
high caliber and like minded individuals and companies who share similar
business philosophy, ethics and values, a sound client base and having the
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zeal and potential to capture a larger market share within their allotted
territory.
How do Business Associates benefit
Access to world-class research, daily, fortnightly, monthly & annually
Strong technology and infrastructure support with regular exclusive
training on risk management and IT systems
Strong national brand name and continuous marketing support
through advertisements, PR, exclusive training programs, marketing
collaterals, wealth creation seminars, etc
A bouquet of equity investment solutions to facilitate cross selling of
products and services-
Advice-based broking on BSE / NSE (Cash, Derivatives
and Commodities*)
Portfolio Management Services (PMS)
E-Broking
Depository Services (MODES)
Mutual Funds & IPOs
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E-BROKING
MOSt E-Broking
There is nothing more exhilarating, more daring and more rewarding than
making the right trade at the right time. E-Broking platform brings a world
class experience of online investing. Buying and selling of shares is now just
a click away.
A multitude of resources like live quotes, charts, research, advice and online
assistance helps you take informed decisions. Our robust risk management
system and 128 bit encryption gives you a complete security about money,
shares, and transaction documents.
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Benefits of Trading Online
Single screen order/trade entry, without going through the hassles of
giving transfer instruction, writing cheques.
Instant order/trade confirmation gives you similar trading experience
as exchange based software without the burden of overhead and
maintenance cost
A refreshing experience of getting outstanding research based advice
on intra day and delivery trades on the same screen
Live quotes of NSE-Cash/Derivative, BSE Cash, Commodity. Create
multiple market watches, default market watch - NIFTY, SENSEX,
and Industrial. You can add NSE-Cash, Derivative & BSE script on
the same market watch
Get access to various online reports like margin report, Demat A/c
details, trades executed, turnover report, net position report with mark
to market profit/loss and realized profit
Online transfer of funds through HDFC Bank
Access to latest research reports, daily market dairy, pivot points,
derivative dairy
View top 20 shares by value or volume traded, along with top gainers
/ losers
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PORTFOLIO MANAGEMENT SERVICE
MOSt PMS Motilal Oswal Securities runs two types of PMS schemes meant for
investors with different investment preferences. While our Value PMS
scheme is meant for investors with long-term interest in the market, there
Bull's Eye PMS scheme is meant for investors who want to take moderate
risk and generate healthy returns from the equity market from time to time.
Its clients, investor community and some of the most prestigious
publications like Asia money and Institutional Investors amongst others
acknowledge Motilal Oswal Securities as one of the leading research based
equity broking house in India. With about 15% of our revenue invested in
our research capability, we have some of the sharpest resources that produce
excellent research insights on companies. The same is then passed to our
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highly rated portfolio management and investment advisory team that works
on its personalized investment strategy.
FOR WHOM
Portfolio Management Service (PMS) is meant for investor with long-term
time horizon. Low portfolio churn and capital preservation will be key to
success. Our investment decision will cushion in high .margin of safety. So
that it leaves sufficient room for investor to be invested and nurture his
portfolio.
PMS is a product wherein a customised investment portfolio is created to
suit the investment objectives of a client. In PMS, the responsibility of
creating and tracking the portfolio is handled by the portfolio manager. Idea
generation, order execution, settlement and performance reporting is all
assumed by the PMS provider. This service is particularly advisable for
investors who cannot afford to give time or don’t have those expertises for
day-to-day management of their equity portfolio. They would prefer Mr.
Raamdeo Agarwal, Portfolio Manager, to manage the same. The client
derives the benefit of the professional expertise and experience of Mr.
Raamdeo Agarwal.
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Bull’s Eye PMS
Bull's Eye strategy to better returns . . .
Here is the investment strategy MOSt employ to generate desired returns
through there Bull's Eye PMS scheme. They believe Investing = Hunting.
It’s about identifying the right stocks, picking and exiting at the right times
and then continuing the cycle.
Identifying the right stocks: There strong, proven Fundamental
Analysis skill allows them to understand the profile and the
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performance of various companies. This allows them to pick the
wheat from the chaff.*
Determining Entry and Exit Points: After identifying the companies
for investment, they resort to technical analysis, read the market
condition and pick up the stocks in opportune sectors. They believe
that apart from the right entry levels, selling at the right time is
equally important. Therefore, they employ similar strategy while
exiting the stock. And this completes there hunt for good returns.
Moderate risk is the key philosophy: they take moderate risk while
making any investment. Duration of the investment is one to six
months. So even while a stock may look fundamentally strong, the
age of there investment in it may depend on the reality based on
technical research along with the prevailing market conditions.
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Value Hedging PMS
Value Hedging PMS is a promising scheme that may be a unique and
pioneering effort in its segment. Not only will there clients benefit from
there exceptional stock-picking ability, but also capitalise on short-term
price volatility.
Through this scheme they offer that delicate balance between long-term
returns and short-term gains.
The Value Hedging PMS is primarily a hedging based discretionary PMS
product. They will do the following to bring best results:
They will pick stocks based on there value investing philosophy
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Various derivatives strategies will be used to hedge portfolio based on
prevailing market conditions. For example, in a bearish market they
can hedge position by writing the calls and collecting premiums and at
the same time they can buy the puts to avoid the fall in asset value vis-
a-vis market fall.
Needless to say, most of the stocks they pick will have to be on the
derivatives list. With an increasing list, almost every important stock will be
a part of the derivatives segment. The Value Hedging PMS might also invest
in some non-F&O stocks in case the investment rationale is very compelling.
Value Hedging PMS is managed by Mr. Jigar Shah. Mr. Shah has a proven
track record of more than 5 years advising top High Networth Clients on
their equity investments.
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MUTUAL FUNDS
Emergence of Mutual Funds
Markets are increasingly becoming more sophisticated and
complex
investors need a financial intermediary who provides the
required knowledge and professional expertise on successful
investing
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Incremental flow of funds into mutual funds rather than
traditional avenues
Started in India since 1964.
MOSt Mutual
To enable clients diversify their investments Motilal Oswal Securities
Limited has added another product in its bouquet and will now offer mutual
funds.
MOSt mutual team is in close contact with various fund houses and
interactive sessions are held with fund managers. They provide client with
regular updates on products and new schemes. Being one of the stock
brokers they keep a close watch on the markets. Based on client risk
appetite, investment horizon and there existing investments team will
suggest investment in mutual fund schemes, which are best, suited to client.
The fund and scheme selection is done after an in-depth research on
parameters like risk adjusted returns, rolling returns, volatility and portfolio
churn. Team advises a mature and long-term view on mutual fund
investments. MOSt Mutual doesn't stop at just that, they go a step further to
ensure that client get the right NAV, there dividends are credited on time
and there account statements are regularly received.
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COMMODITIES
Commodities are a integral part of our life.
They form a part of the:
Food we eat (Pulses, Food grains, Oil & Oil seeds)
Clothes we wear (Cotton, Silk)
Precious Metals (Gold & Silver)
Investors looking for a fast-paced dynamic market with excellent liquidity
can trade in Commodity Futures Market. The Commodity Exchange is a
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Public Market forum and anyone can play in these vital Commodity
Markets. Motilal Oswal Commodities Broker (P) Ltd can provide an entry to
the Commodity Markets. MOCB is a registered trading-cum-clearing
member of NCDEX. MOCB offers advice on investments, strategy &
provide research with trading advice.
Chapter: 2 Organizational Structure
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The basic organizational structure is as follows:
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The branch has divisions in-
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- Marketing,
- Advisory &
-Support & Function.
Each of these fields has separate hierarchy followed. The split takes place
right after Regional Manager.
The internship was undertaken at Shanthinagar Branch of MOSt. The
following was the organizational structure at this branch:
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Chapter: 3 Operational Aspects of
Different Functional
Department
Functional Departments
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MARKETING
In this department where the demat account as well as Mutual Funds is
marketed, marketing executives are seeks for prospective customers, they
helps in opening of an account and also these executives collects AMCs and
provide other services.
ACCOUNTS
Maintaining the purchases of stores department
Internal auditing
Payments and receipts
HR & ADMINISTRATION
PAY ROLL MAINTAINANCE: maintenance of employee details like
salary incentives, bonus, and performance records etc
RECRUITMENT DEPARTMENT: this department helps in assessing the
needs of Labor force and recruiting the needs of Labor and giving the
orientation programme to new employees.
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HRD:
Maintain good relation ship with the employees
Identifying the demotivated employees and providing the necessary
motivation
Accepting problems of the workers and helps in solving them,,
SUPPORT & FUNCTION
FRONT OFFICE
In front office the following services are done.
· Account opening
· Holding enquiries
· Transfer of physical shares to demat form
· Transfer of demat shares to physical form
· Transformations of shares from demat to trading account etc...
BACK OFFICE
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· Maintenance of all demat account
· Giving intimation related to the due of AMC’s to their account holders
· Sends quarterly information to the holders related to the holdings
ADVISORY SERVICES
This is the main function done by the department, MOSt gives every
financial advisory service to investors e.g.: portfolio management, equity
tips, tax planning etc.
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Chapter: 4 Performance Evaluation
SWOT ANALYSIS:
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Strength
Large and diverse distribution network
MOSt financial products and services are distributed through a pan-India
network. The business has grown from a single location to a nationwide
network spread across 1,160 Business Locations operated by them and their
Business Associates in 363 cities and towns.
Strong research and sales teams
28 equity research analysts covering 208 companies in 25 sectors and 5
analysts covering 18 commodities.
In 2006, Asia money rated a member of their sales team as the best sales
person for Indian equities.
Experienced top management
Both of Promoters, Mr. Motilal Oswal and Mr. Raamdeo Agrawal, are
qualified chartered accountants with over two decades of experience each in
the financial services industry. In addition, our top management team
comprises qualified and experienced professionals with a successful track
record
Well-established brand
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Motilal Oswal is a well-established brand among retail and institutional
investors in India. They believe that their brand is associated with high
quality research and advice as well as our corporate values, like integrity
and excellence in execution.
Wide range of financial products and services
Healthy Financial Market
Excellent Infrastructure
1 of the top 5 broker in the country
MOFSL’ presence in the field of finance for a long time.
Weakness The main concern with the brokerage business is cyclicality. Trading volumes drop sharply during a downturn. When the Indian stockmarket enters the bear phase, Motilal Oswal will be affected.
Leading firms are better placed to weather a downturn and may even be able to accelerate industry consolidation by rolling up smaller firms that have been affected to a much larger extent.
Dependency on third parties exposes us to losses caused by financial or other problems experienced by them.
MOFSL operate on leased premises.
MOFSL have entered into a number of related party transactions.
Opportunities
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Good Customer Base
Rising consumer incomes will translate into disproportionately higher
allocation of these funds into equities.
Right now, under 3% of India's retail assets are invested in stock
markets. Cash, bank deposits, real estate and gold dominate the pie-
chart on how Indians invest their wealth. As economies develop, there
is all possibility that this % rises.
Further, the stock broking industry is highly fragmented and seeing a
gradual consolidation. Motilal Oswal's growth has outpaced that of the
industry and the company should continue to gain from this
consolidation in stock markets.
Growing IPO issues
Can make use of sustained growth in retail segment of financial
Product.
Economic growth in India
Rising of FDI
Growing consumer awareness about equity related product.
Threats
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Existing Competitors
Market Uncertainty
Political instability or changes in the government could delay the
liberalisation of the Indian economy and adversely affect economic
conditions in India generally, which could impact our financial results
and prospects.
Broad economic factors like inflation etc.
We have reputational risks in respect of our distribution of third party
products Downturns or disruptions in the securities markets could reduce
transaction volumes, and could cause a decline in the business and
impact profitability.
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Chapter: 5 Problem Areas
FINDINGS:
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Motilal Oswal Financial Services (MOFSL), a financial services company
focused on wealth creation for all its customers such as institutional and
corporate clients, HNI and retail customers, proposes to enter capital
markets with an initial public offering (IPO) of 29, 82,710 equity shares of
Rs 5 each for cash at a price band between Rs 725 and Rs 825 per share with
100% book building process.
The company is going to raise Rs 216.25 crore in lower end of the price
band and Rs 246 crore at higher band, as per its DRHP filed with Sebi.
The issue comprises a net issue to the public of 2,840,400 equity shares of
Rs 5 each and a reservation of 142,310 equity shares of Rs 5 each for
subscription by eligible employees at the issue price. The issue will
constitute 10.50% and the net issue will constitute 10.00% of the post issue
paid-up equity capital of the company.
The equity shares are proposed to be listed on the BSE and NSE. Citigroup
Global Markets India Pvt Ltd is the book running lead manager and In time
Spectrum Registry is the registrar to the issue.
MOFSL is the holding company of Motilal Oswal Securities Limited
(MOSL-broking business), Motilal Oswal Commodities Brokers Pvt. Ltd
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(MOCB-commodity business), Motilal Oswal Investment Advisors Pvt. Ltd
(MOIA-investment banking business) and Motilal Oswal Venture Capital
Advisors Pvt. Ltd (MOVC-venture capital advisory).
In the year 2006, private equity investors New Vernon Private Equity
Limited and Bessemer Venture Partners Trust bought a 9.47% stake in the
company for Rs 518.9 per share (the face value per share being Rs 5).
Motilal Oswal Financial Services Ltd proposes to infuse funds into MOSL
and in MOCB in the form of a subscription for their equity shares, unsecured
loan or any combination thereof. Such capital infusion will help strengthen
their respective balance sheets and thus enable them to increase trading
volumes in the equities and commodities market. MOFSL provides a
financing facility to its retail broking customers. MOFSL proposes to
enhance this financing facility.
MOSt is one of the leading broking houses in the Equity Market. MOSt has
good success rate as lead managers. It has Branches all over country. Its
biggest strength is their presence in the field of finance for a long time.
PROBLEMS AREAS
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The market, in which the organization is a part, is volatile. Risk is the major
concern which is of prime concern in the trading associated with the cash
market.
Lack of penetration in market of Mutual funds.
Advices related to equity market are given to HNI clients only.
Advertisement policy of MOSt is not as effective as it should be.
MOSL contributed 99.99% and 91.95% of our total consolidated
revenues for the Financial Year 2006 and nine months ended
December 31, 2006, respectively. We are substantially dependent on
MOSL and any decline in MOSL’s revenues and profit margins will
adversely affect our consolidated results.
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Chapter: 6
Recommendations
RECOMMENDATION:
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Providing Multi department skill, Multi work skill training to
employees in order to give the tough competition to competitors and
also employees become more skilled.
Should pay more attention to the market of Mutual Funds.
Most of the existing investors not aware about the different products
of MOSt, so there is urgent need to publicize the services.
Addressing the customer’s queries and receiving constant feedback is
a must because MOSt is an online portal and there is very less
exchange of communication between the customers and the principal.
The company can start its own mutual fund and start investing in
stocks, debts and government securities. It has a special and dedicated
Research Desk who are into constant monitoring of the share markets.
It can take advantage of this and start a separate mutual fund. People
will have good confidence in this and the business can also be
profitable.
Continuing to build our brand, particularly in our new businesses, like
investment banking and venture capital management will be critical to
achieving widespread recognition.
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Chapter: 7 Conclusion
Conclusion
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Investment in India has become more of a security necessity than a business
lifestyle. As the interest rates all over are dropping, people are switching to
other avenues which fetch better results. The risk band that initially existed
as been eased out and people are on the lookout for new and better stuff. In
olden days, one could invest only in a few companies, but the present day
has given people to try a wide range of companies. The decision in regard to
investments is based on the sector performance as well as the strong
fundamentals of the company. The act of speculation has considerably been
reduced due to the statistical data and its analysis that companies like MOSt
do and people have become intelligent investors rather than mere
speculators. It was a very fruitful experience working in MOSt as a
management trainee. It offered exposure to the wide range of investment
options available. The risk factors involved could be understood easily. Not
only did it give a learning experience but also gave an idea on how we could
incorporate the various investment options, discovered by the economists,
into a good planning package.
BIBILOGRAPHY:
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www.motilaloswal.com
www.nseindia.com
www.investopedia.com
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PART:B
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A
MICROSCOPIC STUDY
ON
T+1 SETTLEMENT CYCLE
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INTRODUCTION
BACKGROUND
Capital markets are in the midst of a global, systemic restructuring.
Communication and technology have enabled individual financial markets to
link together creating one global market. Internationally, retail and
institutional investors have been empowered leading to a more dynamic and
sensitive market. The use of technology has enabled the investor populace to
discount news more quickly and comprehensively. Technology has also
enabled the formation of a larger and a fair market place. This platform has
been a launching pad for the exponential growth in volumes showing a
widespread and diverse interest in the securities market.
As the volume of securities trading in the global market place has increased
in the recent years, the need for shortening the settlement and clearance
cycle as a cost saving and risk management discipline has become critical to
the orderly conduct of business. As a result many jurisdictions around the
world are adopting shorter settlement cycle.
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A reduced settlement cycle aligns efficiency of the clearing and settlement
process with the efficiency and effectiveness clients can expect from the
front end of the trade processes. It is therefore really believed that achieving
a reduced settlement cycle is critical for further development of the
securities market.
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THE INDIAN CONTEXT
"… .. market risk management becomes far more efficacious at shorter
settlement cycle. There is need, therefore, to move to T+1 rolling
settlement from the existing T+3 by tuning up the funds and securities
processing cycle. SEBI is being advised to take necessary action in this
regard in consultation with the RBI. "
Shri Jaswant Singh
(2002)
The Indian securities market too has tackled challenges and embraced
innovations in technology. The volumes in the domestic markets have
increased substantially over the years. The cross border trades, more
popularly known as FII trades, have also increased over a period of time.
In July 2001, the Indian securities market made a paradigm shift from the
century old account period settlement to a T+5 rolling settlement. Keeping
abreast with the dynamics of the securities market and to integrate with the
world markets, in april 2002, the Indian capital markets joined the league of
developed markets in the world by the introduction of the T+3 settlement
cycle.
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However the increasing volumes and the need for greater finance to fund the
higher volumes have prompted policy makers and regulators to consider
reducing the settlement cycle to T+1 rolling settlement.
There are four key features which characterise the reduction in the
settlement process:
1) Seamless communication among all relevant market participants –
multiple service providers are to be linked together in a seamless and cost-
effective manner;
2) Significant real time processing – as settlement time frames are
compressed real time or near real time processing needs to be achieved by
all participants and dependencies on manual processes would be reduced
significantly;
3) Virtual and not physical processing – there will be reduction if not a
gradual elimination of physical securities and cheques; and
4) Concurrent and no sequential exchange of data and information – many
steps in the transaction processing which are now occur sequentially or in
batch modes would have to be concurrent.
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To achieve this shift effectively, all market participants would be required to
join in the efforts and begin preparing their own internal systems. The
shortened cycle will affect all facets of the industry including broker /
dealers, banks, transfer agents, custodians, investment managers and
institutions.
A reduced settlement cycle aligns efficiency of the clearing and settlement
process with the efficiency and effectiveness clients can expect from the
front end of the trade processes. It is therefore generally believed that
achieving a reduced settlement cycle is critical for further development of
the securities market. For one it significantly reduces settlement risk; second
it has economic benefits and increases greater flexibility of trading and
investing
Some policy thinkers agree with the above contention and feel that it is
necessary to handle growing trade volumes and reduce risk, while others
contend that the cost / benefit equation doesn't warrant the necessary work.
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INTERNATIONAL CONTEXT
The current T+2 settlement cycle was achieved in the US after an experience
with times of market turbulence made the risks of a five-day settlement
cycle abundantly clear. T+5 allowed too much time between trade execution
and settlement for a trading party to become insolvent or for the value of a
trade to deteriorate. But the U.S., a proactive regulatory environment is
accelerating the trends towards further streamlining and automating
processes towards further risk reduction and improved customer service.
For example the Securities and Exchange Commission (SEC), has
recommended quite sometime back that U.S. financial markets should
reduce the settlement window from three days after trade date (T+3) to next
day or Trade Date + 1 (T+1). The move to T+1 would imply automation of
each step in the settlement process ("commonly referred to as Straight
through processing"). Though, it must be said in the same breath that the
US markets have number of times postponed deadlines for achieving this;
which itself testifies the difficulties and the investments required, in
completely automating the process from trade order and execution to
settlement.
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In Canada, which achieved the change from T+5 to T+3 in 1995, the
Canadian Capital Markets Association (CCMA) is leading the move to
T+1.The reasons for moving to T+1 are the same as they were back then:
significantly increasing trading volumes, market volatility and competitive
pressures from other markets.
The CCMA has set its timetable with the US. Given the interconnectedness
of the Canadian industry with that of the US, the CCMA decided it was
essential to follow the US timetable. The other consideration is that many
securities are traded on both countries’ exchanges. By synchronizing T+1
with the US, the CCMA hopes to avoid crossborder arbitrages whereby
investors can trade wherever the system is most efficient.
In Europe, firms are now creating direct links to settle stock exchange-listed
equities resolve cross-border settlement issues. Efforts are underway to
develop industry communication standards and to normalize exchange
services to prepare for effective global capital movement.
In Asia, particularly in Japan, Singapore and Hong Kong, significant
progress has been made to establish shortened settlement cycles in recent
years. In 1997 a Trade Date +3 (T+3) settlement convention was adopted for
Japanese government bonds (JGBs)— a substantial decrease from the
previous mark of Trade Date +7 (T+7).
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In addition, the Bank of Japan had taken the lead in developing a Real
Time Gross Settlement (RTGS) system for JGBs. RTGS will provide live
intra-day settlement, and marks a critical step in developing a local
infrastructure that will eventually permit T+1 settlement. Widespread
adoption of a T+1 standard, however, remains several years away.
In Singapore and Hong Kong, widespread moves to adopt T+1 are
underway. Finance ministries across Asia recognize that reducing the
duration of the settlement cycle and implementing RTGS is desirable,
although cross-border implementation initiatives, such as those in Europe,
do not exist to date. In those markets where there are currently no plans to
shorten the settlement cycle to T+1, the SEC's recent pronouncements has
stimulated debate and introspection on the issue and serve as a catalyst for
change.
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CURRENT SCENARIO
The success of T+3 system and the rapid growth shown by depositories and
depository participants and the ease at which the market intermediaries
adapted to the changing environment saw the emergence of T+2 settlement
cycle that is presently in vogue. For many years, our markets operated on
a "T+5" settlement. As T+5 allowed too much time between trade
execution and settlement for a trading party to become insolvent or for the
value of a trade to deteriorate, the SEC reduced the settlement cycle from
five business days to three business days, which in turn lessened the amount
of money that needs to be collected at any one time and strengthened our
financial markets.
The reasons that took exchanges from T+5 to T+2 are now leading them to
T+1. However, the road to T+1 is even more difficult than the one to
T+2.
Kinds of Security transactions under T+2
Most security transactions, including stocks, bonds, municipal securities,
mutual funds traded through a broker, and limited partnerships that trade on
an exchange, must settle in three days.
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Exceptions
Government securities and stock options settle on the next business day
following the trade. For certificates of deposit and commercial paper, the
transaction on the same day. For U.S. treasuries, it is the next day (T+1), and
forex transactions are settled two days after (T+2).
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Working of stock market:
A market trade is one that is settled through participation of a Clearing
Corporation. In the depository environment, the securities move through
account transfer. Once the trade is executed by the broker on the stock
exchange, the seller gives a delivery instruction to his DP to transfer
securities to his broker's account. The broker has to then complete the pay-in
before the deadline prescribed by the stock exchange. The broker removes
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securities from his account to CC/CH of the stock exchange concerned,
before the deadline given by the stock exchange.
The CC/CH gives pay-out and securities are transferred to the buying
broker's account. The broker then gives delivery instructions to his DP to
transfer securities to the buyer's account. The movement of funds takes place
outside the NSDL system.
1. Seller gives delivery instructions to his DP to move securities from his
account to his broker's account.
2. Securities are transferred from broker's account to CC on the basis of a
delivery out instruction.
3. On pay-out, securities are moved from CC to buying broker's account
4. Buying broker gives instructions and securities move to the buyer's
account.
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AN OVERVIEW OF T+1 SETTLEMENT CYCLE
Under a T+1 settlement cycle, investors will probably have to change the
way in which they buy and sell securities. For example, investors who hold
certificates may have to deliver the certificates to their brokerage firm before
their brokerage firm will execute their orders. Investors purchasing securities
may need to have funds at their brokerage firm before their brokerage firm
will execute their orders.
The settlement period T+1 denotes “transaction date plus one day”.
The T stands for transaction date, which is the day the transaction takes
place. The number 1 denote how many days after the transaction date the
settlement or the transfer of money and security ownership takes place. For
determining the settlement date the only days that are counted are those on
which the stock market is open.
The period between transaction and settlement should not be considered as
a flex time in which one can back out of the deal. The deal is done on the
transaction day--it's just the transfer that does not take place until later. The
parties participating in a transaction an obligation to perform their par. For
example, for two parties involved in a futures contract, the seller is obligated
to sell and deliver the underlying asset and the buyer is
contractually obligated to pay the agreed upon price and accept the delivery.
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Simply put, Under T+1 rule, when one buys securities, the brokerage firm
must receive the payment no later than one business day after the trade is
executed. When one sells a security, he/she must deliver to the respective
brokerage firm the securities certificate no later than one business day after
the sale. The securities are generally held in the form of electronic accounts
under this context
In a T+1 environment, almost all trades will be executed electronically.
Regulatory amendments will be required as electronic certificates replace the
majority of paper ones. Currently, certificates are kept by their holders or
securities custodians. With T+1, electronic positions will have to exist for
any remaining certificates before those stocks are traded. “The mag- nitude
of the changes required is better understood when one considers that the
work that took three days to complete will [with T+1] be completed in one
day,” says Jean-Pierre Maisonneuve of the Ontario Securities Commission.
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Problems in the way of implementing T+1
• Manual processing and the lack of automation even after the T+3;
• Lack of real time functionality where the technology is employed;
• Lack of standard interfaces and the inter operability;
• Lack of data integrity and standards;
• The need to fully immobilize securities to prevent lengthy processing
and turn-around times..
• The need to overhaul the prospectus delivery rules
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Removing these obstacles means introducing the Straight Through
Processing;
The Straight Through Processing (STP) is an overall business and
technology strategy to reduce the risk, cut costs, improve the customer
services, handle larger volumes, and have greater ability to introduce new
products. It is best described as the seamless integration of systems, and the
processes to automate the trade process from end to end. That is from the
trade execution, to confirmation, to settlement without the manual
interventions and the redundant processing. The benefits of the STP go
beyond introducing the T+1, but primarily it is the desire to move to the T+1
that is behind introducing the STP.
"Achieving straight through processing will streamline back-office
procedures, increasing efficiency to the system while minimizing
operational risk. Through automation, manual intervention will become
the exception rather than the norm. As a result, fewer fails will occur by
human error, and accurate trade data will reach the clearing corporation
and the depository more quickly. Back-office staff can then focus on
processing today's trades rather than correcting yesterday's."
R. Bruce Striegler
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The STP requires
(i) Standardization of the software and the hardware in brokerage houses and
other places;
(ii) Real time information flows to all participants; and (iii) reliable and
flexible technology infrastructure.
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FACTS ABOUT STRAIGHT THROUGH PROCESSING (STP)
Distinguishing STP from T+1
Some believe T+1 is the only way for firms to forward their STP
agenda.Others thinks that to achieve T+1 firms need to be STP ready first.
Even before the postponement of T+1, we believed – and still do – that STP
is the answer. Before T+1 can be a reality, firms must efficiently process
internally. Then they can respond more effectively to external pressures and
interact with other industry participants in a timely manner during the
transaction lifecycle.
T+1 Is Anticlimactic
Achieving STP industry initiatives will reduce the overall risk experienced
in today’s processing environment – significantly enough to make T+1
anticlimactic. Focusing on institutional transaction matching as a
prerequisite for settlement will reduce credit and, therefore, market exposure
for a substantial portion of the marketplace. Reducing manual processing
associated with recalling securities lending arrangements and e physical
certificates decrease the likelihood of operational risk. Implementing these
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types of STP initiatives will go a long way to reducing overall risk without
having to change the settlement cycle.
The Real-Time Difference
Regardless of T+1, real-time or “near” real time processing does make a
difference. Being able to identify potential problems or discrepancies as
soon as they occur allows firms to respond better to risk – credit, market,
Operational – associated with “broken” transactions. Indeed, providing real-
time information for transactions across the enterprise allows the firm to
make more timely business decisions to mitigate risk or take advantage of
market opportunities. Add to that the fact that customers are demanding
more timely information to make their own business decisions and you’ll
arrive at the conclusion that real-time does matter.
Start with Strategic Processes
Although all firms will benefit from having an STP environment, one should
understand the practical reality that it may not be cost-effective for every
process in every firm to be “straight through”. Each internal STP initiative
should be analyzed to ensure that the benefits are worth the effort, time and
cost associated. However, to completely ignore STP would leave an
organization unable to compete.
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Gain a Competitive Advantage
Without STP, firms limit utilizing their ability in a world that increasingly
calls for agility and cost effectiveness. Firms can get rid of manual and batch
processing, employ consistent standards, move to relying on “thinkers”
instead of processors and “break down the data walls “of business silos.
Getting “straight through” offers an institution the ability to provide
consistent, consolidated data that customers demand and that firms need to
make appropriate business decisions. STP also allows them to focus on their
core competencies and increase capacity without adding infrastructure.
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THE HOLISTIC STP APPROACH
Business processes and technology play key roles in realizing STP. Still, to
achieve the full benefits of STP requires more than simply restructuring
processes and deploying new technology. Other key perspectives are
essential to ensure STP allows a firm to better achieve all its business
objectives.
In addition to business processes and technology, we encourage our clients
to address other perspectives as part of the holistic process of achieving
straight through processing.
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Firms should ask themselves the following critical questions to ensure
they are addressing all aspects of their straight through processing
environment.
Regulatory/Compliance
• Does the processing environment satisfy the regulatory requirements?
Organizational Design
• Does the organizational structure support the processing environment?
• What are the needed skill sets and how can the regulatory requirements?
Risk Management
• What are the risks associated with the new processing environment?
• What are the risks associated with not implementing the new processing
environment?
• What actions are required to mitigate the new risks?
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Internal Controls Practices
• Are the proper ‘checks and balances’ in place?
• What are the key metrics to monitor business and controls performance?
Financial Reporting and Corporate Responsibility
• Is there transparency of information across the organization?
• Do the processes reflect the governance policies and culture?
Business Continuity
• Are recovery processes in place to ensure minimal loss of business and
reputation?
Change/Leadership Management
• Is there a communication plan to garner “buy-in” and promote
commitment?
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Risk Reduction Benefits of Shorter Settlement Cycles
The goal of shortening the settlement cycle is to reduce risks that can lead to
systemic disruptions in the financial markets.
Risks Prior to Settlement
Pre-settlement risk is defined as the risk that counterparty to a transaction
for completion at a future date will default before final settlement. The
resulting exposure is the cost of replacing the original transaction at current
market prices. This is also known as replacement cost risk.
Pre-settlement risk is of concern because it involves a change in the value of
the securities if one of the party’s defaults. If the default is by a major
player, it might suffer credit losses as large as to create systemic problems. If
you reduce the time you reduce pre-settlement risk. A good example of this
is the 1987 market break – where the settlement cycle was T+5. During
those five days, ten of the 30 DJIA stocks declined 35% or more. A default
by the buyer of one of those stocks would have exposed the seller to big
losses. There are other examples … on October 27, 1997 the DJIA declined
by 554.26 points … on August 31, 1998, the DJIA fell by 512.61 points.
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With sharp price movements, traders may be unwilling or unable to meet
margin calls and default on their delivery obligations.
Risks at Settlement
Settlement risk means the risk that settlement in a transfer system will not
take place as expected. This might be both credit and liquidity risk. This is
also known as principal risk – the risk of loss of securities or payments
made to the defaulting party before the detection of the default. In this
scenario, both the buyer and seller are exposed to risk of loss of the full
principal value of the securities or funds transferred.
In addition, both parties are exposed to liquidity risk on settlement date.
Liquidity risk is the risk that the seller of a security who does not receive
payment when due may have to borrow or liquidate assets to complete other
payments. It also includes risk that the buyer does not receive delivery when
due and may have to borrow the security in order to complete its own
delivery obligation. The Commission believes that liquidity problems have
the potential to create systemic disruptions.
Liquidity problems have the potential to create systemic disruptions. In
particular, if liquidity problems arise when securities prices are changing
rapidly, failures to meet obligations when due are more likely to elevate
concerns about solvency. In the absence of a strong linkage between
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delivery and payment, the emergence of systemic liquidity problems at such
times is especially likely. The fear of losing the full principal value of
securities or funds could induce some participants to withhold deliveries and
payments, which, in turn, may prevent other participants from meeting their
obligations.
Operational Risk
Operational risk is the risk that deficiencies in information systems or
internal controls, human errors or management failures will result in
unexpected losses. As clearing and settlement systems become more
dependent on information systems, the reliability of these systems (errors or
delays in processing, system outages, insufficient capacity, and fraud) is a
key element in operational risk.
Operational deficiencies within a broker-dealer, a clearing corporation, or at
an exchange can increase the risk of loss to market participants and
investors. These deficiencies can reduce the effectiveness of other measures
that the settlement system takes to manage risk. For example, operational
problems could impair the system's ability to complete settlement, create
liquidity pressures on the market or participants, or hamper the system's
ability to monitor and manage credit exposures. Possible operational failures
include errors or delays in processing, system outages, insufficient capacity,
or fraud by staff
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The events of September 11, 2001, demonstrated how operational risk
results from unforeseen events that can directly and severely affect market
functions. Generally, financial crises involve both operational and credit
issues. In contrast, the events of September 11, 2001, were unusual in that
the settlement problems that did occur resulted almost exclusively from
operational problems. No firm failed in the immediate aftermath of the
terrorist attacks, although some firms were severely affected. If credit
problems had arisen, the systemic consequences could have been severe.
However, the attacks did highlight the need to examine the risks in the
clearance and settlement system, including the need for a resilient clearance
and settlement infrastructure.
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COSTS OF IMPLEMENTING T+1
T+10 T+5 T+3 T+1
Technology C l it &
Cost
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1) SIA’s Business Case Model Report
According to SIA's Business Case Model report, moving to T+1 will cost
approximately $8 billion, a figure that covers upgrading information systems
and processes, purchasing new software and training, but will save the
industry $2.7 billion a year.
The SIA estimated that settlement exposure would decrease by $250 billion
in a T+1 environment. With fewer open positions at the clearing agencies,
the SIA purported that T+1 settlement could reduce participants' clearing
fund obligations by one-third. Additionally, operational risk for custodians
would also be reduced as the number of pending settlements decreased. The
SIA further concluded that firms would benefit from an annual cost savings
of approximately $2.7 billion, and would therefore recoup their investment
three years after implementing a T+1 settlement cycle.
Since its publication, a number of critics questioned the assumptions and
conclusions contained in the SIA's Business Case Report, arguing that it
would cost the industry more than $8 billion and the cost recovery would
take longer than three years. Critics also argued that the SIA's Business Case
Report did not adequately quantify the risk reduction benefits of moving to
T+1.
However, Towergroup, a leading research and advisory firm puts the
figure at $19billion.
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2) Costs to Cross-Border Trading
Reducing the settlement cycle is neither costless nor without risk. "This is
especially true for markets with significant cross-border activity because
differences in time zones and national holidays, and the frequent
involvement of multiple intermediaries, make timely confirmation more
difficult. In most markets, a move to T+1 would require a substantial
reconfiguration of the trade settlement process and an upgrade of existing
systems. For markets with a significant share of cross-border trades,
substantial system improvements may be essential to shortening settlement
cycles. Without such investments, a move to a shorter settlement cycle could
generate increased settlement fails, with a higher proportion of participants
unable to agree and exchange settlement data or to acquire the necessary
resources for settlement in the time available. Consequently, replacement
cost risk would not be reduced as much as anticipated and operational risk
and liquidity risk could increase.
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Why T+1?
1. To reduce risk and increase efficiency in securities.
The longer the period between trade and settlement, the larger the
volume of unsettled trades at any given moment and greater the
exposure to the risk.
2. To cope with increasing trading volumes.
3. To remain competitive and please investors by reducing cost.
4. To reduce counterparty credit risks by reducing the number and value
of trades awaiting settlement and by reducing the potential for losses
from those unsettled trades should a participant default.
5. T+1 is another important plank in our quest to improve the global
competitiveness of our capital markets.
6. To increase operating efficiency and reduce the probability of
settlement errors.
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MOVING TO T+1….
ARE WE READY?
To achieve "real STP" and T+1, many diverse transactions, system
functions and operations must occur simultaneously. This highly parallel-
processing environment will need to be supported by a complementary-
technical architecture and organization design.
NO EASY APPROACH
Many buy-side firms are taking the approach that STP can be implemented
by tacking on an order-management system to the front end, automating
some manual procedures in the back office and buying some middleware to
integrate diverse hardware and software platforms. Many of these same
firms are finding that these adjustments do not guarantee T+1 processing
capability and that it certainly isn't easier to support nor any less expensive.
This patch-work approach is more likely to increase maintenance
requirements and processing errors, reduce efficiency and thereby increase
operational risk. As a result, these firms are missing the opportunity to
implement the parallel-processing capability needed to support the reduced-
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settlement cycle, increase operating efficiency and reduce the probability of
settlement errors.
Parallel processing requires fundamental changes in back-office operations
and technology architecture, as well as basic business practices and
organizational design. In other words, the scope of changes required to
support T+1 is far beyond the changes most buy-side firms are planning or
implementing today.
TECHNOLOGY UPGRADES REQUIRED
As the T+1 settlement models are developed and published, a better
understanding is developing of the implementation requirements for these
processes. The core processes of these models, and the time frame in which
they must be executed, require a high degree of parallel processing. This will
require real-time, concurrent multi-stage trade-data enrichment for
executing, allocating and settling trades which will be particularly true for
high-volume environments. Current systems and processes will need to be
modified to allow for partial, asynchronous updates of information.
Trade interrupts will have to be recognized, handled and communicated to
other systems on a real-time basis. This approach represents a major change
from the way most investment systems have been designed. The integration
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of the virtual-matching utilities (VMUs), whether it is Omgeo, GSTP, or
SunGard, is critical to any solution and many internal processes and systems
will have to be modified to take advantage of the VMU capabilities.
Predictably, parallel processing requires substantial upgrades in processing
capacity.
Many organizations will look toward technology as the primary enabler (or
disabler) for achieving T+1. Technical architecture, often an afterthought in
an industry focused on multi-vendor, best-of-breed solutions, may ultimately
determine a firm's ability to support T+1.
While integration tools such as middleware may be part of the solution, few
order-management or portfolio-accounting systems have been designed to
take advantage of functionality such as guaranteed message delivery or
rules-based processing that middleware can support. Historically, attempts at
ERP-like (Enterprise Resource Planning) application suites for the buy
side have not been well accepted. This approach may begin to make more
sense as organizations consider the impact of the reduced-settlement cycle
and struggle to support it with multiple vendors on multiple platforms.
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DATA INTEGRITY IS THE KEY
A fundamental dedication to data integrity that currently exists in few
organizations will be essential to supporting T+1. Because of the shorter
settlement cycle there will be less time to find and correct data problems.
Multiple accounting systems and multiple security-master databases
become increasing burdens in the T+1 environment due to the limited time
to reconcile and correct data. Unless the data is managed and sourced from a
single internal or external source, such as a data warehouse, multiple
security masters will increase the risk of data errors occurring. Because
information integrity is fundamental to the investment process and T+1
reduces the window to get accurate information, buy-side organizations will
have to focus on data integrity and determine whether related functions,
such as corporate-action processing, can be supported internally or should be
outsourced to specialists.
At the very least, data management will require a new level of concentration
and attention. In many organizations this will require a new technology
architecture and corresponding process redesign.
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NEW DEMANDS FOR DISASTER RECOVERY
There is no question that disaster recovery has taken on new meaning after
the events of Sept. 11. As a result, awareness of the need to have a carefully
conceived recovery plan has been elevated to the executive level in many
organizations. However, T+1 will require recovery planning at a much more
fundamental, transaction level.
Few buy-side organizations have implemented high-availability systems
such as real-time data and application backups or the ability to cut over to a
'hot' standby without losing any transactions. Potential financial and
operational exposure will have to be recalculated and rethought based on the
timing of the shorter settlement cycle and factors such as trade-execution
exposure.
Under the T+1 scenario, investment in high-availability capabilities is more
easily justified. In conjunction with disaster-recovery capabilities, active
monitoring of trade status on a real-time basis and implementation of
operational-risk systems, in addition to market- and credit-risk systems, will
need to become standard buy-side operations and management tools.
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KNOW THE PARTNERS
Preparing for T+1 will extend beyond the walls of the buy-side organization
and the selection of the right VMU to include careful selection of business
partners as well. In the past, buy-side firms often expanded brokerage and
custodian relationships in order to increase potential sources of new business
referrals, frequently without concern as to the impact on operations or
systems overhead.
The operational-efficiency requirements of T+1 will demand a new
approach to adding business partners, including an assessment of the
partners capabilities to support electronic communication such as ISITC for
custodians and FIX for brokers.
Likewise, buy-side managers will find themselves, if they have not already,
similarly evaluated. In this extended enterprise each partner will have to
support minimum operating standards. Brokers and custodians may charge
higher fees or discontinue the relationship if the manager cannot support
electronic-transaction processing using industry-standard protocols.
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PREPARING THE ORGANIZATION
All of these considerations, which are just a small subset of the full impact
of T+1, will require an organization to rethink its design and preparedness.
Bureaucratic or dispersed organizations may find it challenging to support
the reduced-decision-making time required by T+1.
Likewise, matrix-style organizations may find it difficult to integrate or
consolidate the operational and investment decision-making resources.
Without a clear organizational plan for managing the migration to become
T+1 ready, buy-side firms risk getting bogged down in a myriad of
operational challenges that will, in the end, interfere with the investment
process.
Operations and technology requirements for T+1 support will cause a
rethinking of the outsourcing option. This will be true whether the option is
selective, for functions like corporate-action processing, or a 'lift-out' of the
entire technology and operations function. Implementing the changes
described in this article will be expensive and may require organizational
changes that are not desirable to every buy-side organization. As a result,
outsourcing is likely to become an essential tool.. In any case, T+1 can only
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be supported through an integrated approach, which achieves a highly
parallel-processing environment for buy-side managers.
---
The SIA identified ten building blocks as essential to realizing the goal of
improving the speed, safety, and efficiency of the trade settlement process:5
1. Modify internal processes at broker-dealers, asset managers, and
custodians to ensure compliance with compressed settlement deadlines.
2. Identify and comply with accelerated deadlines for submission of trades
to the clearing and settlement systems.
3. Amend the National Securities Clearing Corporation's ("NSCC") trade
guarantee process so that the guarantee is provided on trade date.
4. Report trades to clearing corporations in locked-in format and revise
clearing corporations' output.
5. Rewrite Continuous Net Settlement processes at NSCC to enhance
speed and efficiency.
6. Reduce reliance on checks and use alternative means of payment, such
as automatic debits allowed by the National Automated Clearing House
Association.
7. Immobilize securities shares prior to conducting transactions.
8. Revise the prospectus delivery rules and procedures for initial public
offerings.
9. Develop industry matching utilities and linkages for all asset classes.
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10. Standardize reference data and move to standardized industry protocols
for broker-dealers, asset managers, and custodians.
CONCLUSION
Investment management firms, broker/dealers and custodian banks
recognize the benefits that a T+1 environment can provide. The reduction of
manual processes will be more cost effective and minimize risk. Employees
can move from merely processing transactions to focus on the firm’s core
competencies in providing value to customers. Consolidating data across the
enterprise will allow improved customer service and facilitate reporting.
T+1 settlement cycle is synonymous to greater automation, fewer risks,
faster service and, also, greater market liquidity. This means a pricing
system better matched to the actual value of securities. And since brokers
will reduce their credit exposure, the industry as a whole should benefit.
When investors go to their brokers to buy or sell securities, they have three
expectations. First, the process must be transparent. Second, investors
expect the process to be reliable, with minimal exposure to risks. Finally,
investors want high quality, affordable services. At present, our industry is
able to meet these expectations. However, as trading volumes continue to
rise and as our markets become more global, our ability to offer investors
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exceptional services at competitive prices will be tested. One way to
maintain our standards and retain investor confidence is to increase
efficiency and reduce risk in the clearance and settlement system.
The road to T+1 is definitely a toughest one in terms of cost involved,
technology upgradation, data integrity etc, but once implemented it will
benefit the whole industry by increasing the overall efficiency.
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BIBLIOGRAPHY: www.nseindia.com www.wikipedia.org www.icfai.org www.google.com www.commodityindia.com www.investopedia.com