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Panel on carry forward system seeks changes

The Review Committee on the Carry Forward System, headed by Professor J R Varma, on Tuesday submitted its report to the Securities and Exchange Board of India recommending several significant changes in the revised carry forward system which include abolition of the twin-track system of segregating carry forward and delivery trades.

Professor Varma suggested elimination of the 90-day limit for carried forward transactions, settlement only by delivery after the 75th day, and also abolition of the Rs 100 million limit on financier funding.

However, the committee endorsed some existing safeguards in the modified carry forward system such as capital adequacy and other prudential safeguards and said they must be strictly enforced.

While choosing scrips for carry forward, the exchange authorities must ensure that the scrips have sufficient floating stock and high liquidity. The exchanges should have adequate monitoring and surveillance systems to enable timely use of the various powers vested in them to regulate the market, the committee said.

Dr R H Patil, managing director of the National Stock Exchange did not concur with some of the committee's recommendations and gave a note of dissent. He favoured a twin-track trading system, registration of vyaj badla financiers, and up-front payment of margins.

Professor Varma said a uniform margin of 10 per cent on gross positions with daily marking to market should be applied to both types of transactions and margin payments to the exchange must be value dated the same day.

Over a period of time, he said the exchanges must move towards realisation of margin payments before the next day's trading begins.

As a precondition for adopting the modified carry forward system, he emphasised that an exchange should have a well-designed software for margin computation and well-established governance structures and administrative infrastructure for monitoring and enforcing the margining system.

He suggested elimination of overall limits and sub-limits on purchase and sale, and scripwise limits on carry forward transactions and an overall transactions.

On vyaj badla in respect of dematerialised shares, he said a pledge of the shares should be marked in the electronic records of the depository. In the paper-based system, the committee recommended that shares received by vyaj badla financiers should continue to be deposited with the clearing house as at present.

In addition to other risk-containment measures, the clearing house should at all points of time have an insurance policy covering the aggregate value of shares lying in the clearing house.

UNI