Traditional Stock (& Securities) Exchanges are complex financial eco-systems, that have evolved & matured substantially over the past few centuries. The Key Foundations of Traditional Stock (& Securities) Exchanges are – Wealth of Investors & Health of the Market Intermediaries (some intermediaries are also classified as Market Infrastructure Intermediaries). Highest level of Trust & Integrity in the entire eco-system is of utmost importance. Regulators, Exchanges, Market Intermediaries, Participants & effectively Regulated and Compliant processes amongst them form the Pillars of Strong & Trustworthy Market Places. In this paper, an attempt has been made to cover the Major Markets that have achieved a high level of maturity & have also demonstrated to walk in-step with the various needs & challenges – major or minor - that emerge periodically. Study of USA, UK, Europe, Singapore, Honk Kong & India markets have been covered in this paper. Market Eco-System – Regulators, Exchanges, Intermediaries & Participants

1. A study of Traditional Stock (& Securities) Exchanges, Regulators & Regulations
(in Major Global Markets)
1st
published in Dec 2017
Re-published 1st version in Nov 2023
Ketan Chawda
Mumbai, India.
ketan.chawda@gmail.com
www.linkedin.com/in/ketanchawda
Head of Information Technology (CTO) & CISO – Power Exchange India Ltd. (PXIL)
ex-CTO – United Stock Exchange Ltd. (USE), & Delhi Stock Exchange Ltd. (DSE)
Marathoner (#RunForACause)
Ketan Chawda
(Mumbai,
INDIA)
Digitally signed by
Ketan Chawda
(Mumbai, INDIA)
Date: 2023.11.26
18:05:27 +05'30'

2. pg. 2
1 THE PAPER
2 TRADITIONAL STOCK (& SECURITIES) EXCHANGES...............................................................3
2.1 History & Genesis................................................................................................................................3
2.2 Strategy & Vision.................................................................................................................................4
2.3 Key International Bodies .....................................................................................................................5
2.3.1 International Organisation of Securities Commission (IOSCO) .............................................................5
2.3.2 World Federation of Exchanges (WFE)..................................................................................................5
2.3.3 Other Key Global Regulators & Standards setters ................................................................................6
2.4 Pillars ..................................................................................................................................................7
2.4.1 Regulators, Exchanges, Market Intermediaries ....................................................................................7
2.4.1.1 Regulators & Exchanges (of Major Markets)................................................................................7
2.4.1.2 Exchanges & Market Intermediaries ............................................................................................9
2.4.1.3 Role of Exchanges as Self Regulated Organizations (SROs)..........................................................9
2.4.1.4 Depositories (& Custodians).......................................................................................................10
2.4.1.5 Clearing Corporations.................................................................................................................10
2.4.1.6 Demutualization .........................................................................................................................10
2.4.2 Participants - Investors (Individuals, Institutions, Traders) & Borrowers (Listed Companies &
Securities).........................................................................................................................................................11
2.4.2.1 Investors are broadly classified as Individual Investors & Institutional Investors......................11
2.4.2.2 Investors – Direct Participation v/s InDirect Participation .........................................................11
2.4.2.3 International Participants (Cross Border)...................................................................................12
2.4.2.4 Borrowers...................................................................................................................................12
2.4.2.5 Illustration – Key International Bodies, Exchanges & Market Intermediaries, Participants
(Investors & Borrowers)...............................................................................................................................13
2.4.3 Policies, Processes & Frameworks ......................................................................................................13
2.4.3.1 Registration of Market Intermediaries – Exchanges, Brokers, Institutions, Investors ...............13
2.4.3.2 KYC, common KYC, e-KYC & KYC++.............................................................................................14
2.4.3.3 Risk Rating, Risk Containment, Anti-Money Laundering (AML) and Countering the Financing of
Terrorism (CFT) ............................................................................................................................................16
2.4.3.4 Risk Management.......................................................................................................................18
2.4.3.5 Types of Orders ..........................................................................................................................19
2.4.3.6 Measures to ensure Fair Market Price (prevention of Price Manipulation) ..............................20
2.4.3.7 Payment v/s Delivery (PvD) and Delivery v/s Payment (DvP) ....................................................21
2.4.3.8 Market data - dissemination & revenue....................................................................................21
2.4.3.9 Order log store, Transaction log store........................................................................................21
2.4.3.10 Risk & Recovery mechanisms.....................................................................................................21
2.5 Foundation........................................................................................................................................23
3 REFERENCES......................................................................................................................24
3.1 Traditional Exchanges .......................................................................................................................24
3.1.1 Key International Bodies .....................................................................................................................24
3.1.2 Role of Exchanges as Self Regulated Organizations (SROs).................................................................24
3.1.3 KYC and eKYC & Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT).24
3.1.4 Risk Management ...............................................................................................................................25

3. pg. 3
2 TRADITIONAL STOCK (& SECURITIES) EXCHANGES
2.1 HISTORY & GENESIS
History of Exchanges
Traditional Stock (& Securities) Exchanges are complex financial eco-systems, that have evolved &
matured substantially over the past few centuries.
Most stock exchanges in the early days were associations of traders/brokers who got together in a
common place like under a tree or in the streets or make-shift halls/rooms. New York Stock
Exchange finds its roots to a group of 24 brokers/merchants signing an agreement in 1792 under a
Buttonwood tree which was just outside of 68 Wall Street, & the Agreement was called the
Buttonwood Agreement. They got together & traded in 5 securities. Similarly the London Stock
Exchange has its roots in various forms of associations & groups which operated as a Royal Exchange
from 1571, & then operated from a coffee house, However after being destroyed in the great fire of
London it was re-built and is seen as a shift from coffee houses to a formal modern exchange. But
due to heavy penalties imposed after an act of parliament in 1697 the traders moved out of the
Royal Exchange and started operating from the streets. These later converged into a fresh coffee
house – Jonathan’s Coffee house, post the 7 years war. But trading still happened from streets & an
alternate building called the Rotunda hall of the Bank of England. All these were ultimately regulated
into a formal Stock Exchange by the creation of a subscription room in 1801.
In Asia - In Hong Kong, an Association of Stock Brokers was established in 1866, which then set up as
a formal Stock market in 1891. This Stock market was then renamed to Hong Kong Stock Exchange in
1914. 4 Stock Exchanges came up by 1972 which were then consolidated into a single Hong Kong
Stock Exchange in 1980, though trading operations began only by 1986. Malaysia & Singapore had
traditionally shared a single stock exchange, however Malaysia introduced foreign exchange control
regulations in 1973 which resulted in the discontinuation of currency-interchange between the
Malaysian & Singaporean currencies. This resulted in Singapore Stock Exchange being setup in 1973.
In India, in 1855, a group of 22 stock brokers used to get together near the Mumbai (Bombay) city’s
Town Hall on a make-shift sitting space under the shades of a large banyan tree. As more brokers
started joining they kept moving to a larger place, & eventually in 1875 formed the Native Share &
Stock Brokers Association. This association went on to become the Bombay Stock Exchange.
Introduction of Regulations
In USA, the SEC introduced regulation with the Securities Act in 1933, Securities Exchange Act in
1934, Investor Company Act & Investor Advisers Act in 1940.
In UK, a General Purpose Committee created the 1st
regulations known as the First Rule Book in
1812, which had very comprehensive topics of Settlement & Default. Further the formal Securities &
Investments Board was founded by the UK Treasury, then the Financial Services Authority in 2001, &
ultimately the Financial Conduct Authority in 2013.

4. pg. 4
In Hong Kong, during the amalgamation/standardization of the 4 exchanges, the Stock Exchange
Control Ordinance was introduced in 1973 & then the Securities Ordinance and the Protection of
Investors Ordinance were introduced in 1974.
In Singapore, the Monetary Authority of Singapore was formed by an act of Parliament in 1970,
which preceded the formation of the Singapore Stock Exchange. MAS also acts as the Central Bank &
Financial Regulatory Authority.
In India, the Parliament enacted the Securities Contracts (Regulation) Act in 1956, which forms the
basis of all Stock Exchange Regulations. A Statutory body, the Securities & Exchange Board of India
(SEBI) was created by an act of Parliament in 1992. (This body was though introduced in 1988 as a
non-statutory body to regulate the markets.) SEBI further introduced the Depositories Act in 1996 &
the Securities Laws (Amendment) Act of 2014.
Introduction of Intermediaries
Gradually, most responsibilities in the eco-system started getting distributed & thus market
intermediaries evolved. Each of these intermediaries shoulder one or more independent
responsibilities.
2.2 STRATEGY & VISION
The primary vision of these financial eco-systems of stock exchanges can be summarized into a
single strategy & vision – to protect, develop & regulate the markets so as to effectively protect
investor interests.
Regulators protect, develop & regulate the Capital, Commodity & Currency Markets. Participants
(Investors) participate & provide liquidity to the Markets. Borrowers raise capital from the markets.
Traditional Stock Exchanges are regulated by Independent Regulators in each country/region. These
regulators regulate the formation, qualification, operation of Exchanges; & also protect investor
interests.
In all, there are 30 principles of securities regulation, globally. These principles are based upon the 3
objectives of securities regulation – namely,
• The protection of investors
• Ensuring that the markets are fair, efficient and transparent
• Reduction of systemic risk
Though local markets have their respective differences in structures, these 3 objectives form the
basis of an effective system for securities regulations.
In this paper, an attempt has been made to cover the Major Markets that have achieved a high
level of maturity & have also demonstrated to walk in-step with the various needs & challenges –
major or minor - that emerge periodically. Study of USA, UK, Europe, Singapore, Honk Kong &
India markets have been covered in this paper. An attempt has also been made to study & present
the current-day status of the emerging major Crypto Currency Exchanges & highlight our
recommendations to align them with the above strategy & vision.

5. pg. 5
2.3 KEY INTERNATIONAL BODIES
In order to effectively implement the key objectives, 2 international bodies have evolved.
International Organisation of Securities Commission (IOSCO) & World Federation of Exchanges (WFE)
are the 2 Key Worldwide Bodies/Associations that develop & provide guidance/directives to
country/region specific Major Market Stock Exchange Regulators – so as to build sound global capital
markets and a robust global regulatory framework.
2.3.1 International Organisation of Securities Commission (IOSCO)
International Organisation of Securities Commission (IOSCO) is the global body that sets the global
standards applicable to the securities markets. It develops standards as well as is responsible for
implementation & adherence of these standards. 95% of the Regional/Country-specific regulators
are members of IOSCO. It also works with the G20 & the Financial Stability Board (FSB) towards
introducing reforms to the global regulations. Both the G20 & FSB have endorsed the IOSCO
Objectives & Principles of Securities Regulation. These overarching principles also guide the
oversight & enforcement of these regulations. The evaluation of the securities sector by the
Financial Sector Assessment Programs (FSAPs) by IMF & World Bank are also based on the same
principles. Apart from standards setting, IOSCO also provides the highest levels of technical
assistance, training & education to the regional/country-specific regulators. It also participates as an
observer along with other international organizations.
2.3.2 World Federation of Exchanges (WFE)
The Exchanges (market infrastructure entities) have a global trade association called the World
Federation of Exchanges (WFE). Apart from Exchanges, the Central Counter Party (CCP) Clearing

6. pg. 6
Houses are also granted membership. WFE works with the global standards-setters, regulators,
policy makers, government organisations towards the goal of supporting & promoting the effective
development of securities markets that are fair & transparent along with stability & efficiency. By
sharing the goals of regulatory authorities, the WFE ensures safe & sound financial markets. This in
turn enhances the confidence of investors & thus is vital in promoting economic growth.
Further, the WFE also provides authentic data on exchange traded statistics & 350+ indicators of
market data.
2.3.3 Other Key Global Regulators & Standards setters
• International Monetary Fund
• Basel Committee on Banking Supervision
• European Union (EU)
• INTERPOL
• United Nations Counter-Terrorism Committee and Executive Directorate (UNCTED)
• World Bank

7. pg. 7
2.4 PILLARS
Regulators, Exchanges, Market Intermediaries, Participants & effectively Regulated and Compliant
processes amongst them form the Pillars of Strong & Trustworthy Market Places.
Market Eco-System – Regulators, Exchanges, Intermediaries & Participants
Market Eco-System, can be broadly classified as,
• Regulators
• Exchanges & Market Intermediaries
• Participants – Investors, Borrowers
2.4.1 Regulators, Exchanges, Market Intermediaries
2.4.1.1 Regulators & Exchanges (of Major Markets)
Major Markets - List of Regulators, Acts & Regulations, Exchanges are,
Sr Market Regulator(s) Acts, Regulations Exchanges, Associations
1 USA Securities and Exchange
Commission (SEC) (www.sec.gov)
The mission - to protect
investors, maintain fair, orderly,
and efficient markets, and
facilitate capital formation.
Securities Act of 1933
Securities Exchange Act of 1934
Trust Indenture Act of 1939
Investment Company Act of
1940
Investment Advisers Act of
1940
Sarbanes-Oxley Act of 2002
Dodd-Frank Wall Street Reform
and Consumer Protection Act of
2010
Jumpstart Our Business
Startups Act of 2012
National Securities Exchanges
Bats BYX, BZX, EDGA, EDGX
BOX Options Exchange
Chicago Board Options Exchange
Chicago Stock Exchange
Investors Exchange
Miami Intl Securities Exchange
Miax Pearl
NASDAQ, Nasdaq BX, GEMX, ISE, MRX,
PHLX
NYSE, NYSE ARCA, NYSE AMERICAN, NYSE
National
Securities Associations
Financial Industry Regulatory Authority
(FINRA)
Registered Securities Future Product
Exchanges
CBOE Futures Exchange (CFE)
Chicago Board of Trade (CBOT)
Chicago Mercantile Exchange (CME)
OneChicago (OC)
NQLX (formerly registered)
Securities Futures Associations
National Futures Association (NFA)
2 UK Financial Conduct Authority (FCA)
(which oversees the UK Listing
Authority for markets UKLA)
(www.fca.org.uk)
(www.fca.org.uk/markets/ukla)
The mission - We aim to make
financial markets work well so
that consumers get a fair deal
The Financial Services and
Markets Act 2000
EMIR
European Market Infrastructure
Regulation on derivatives,
central counterparties and
trade repositories (EMIR)
London Stock Exchange (LSE)
London Metal Exchange (LME)
NEX Exchange (former ICAP Securities &
Derivatives Exchange ISDX)
Turquoise (LSE Group)
The Baltic Exchange (will close by 29
December 2017)

8. pg. 8
MiFID II
The Markets in Financial
Instruments Directive is the EU
legislation that regulates firms
who provide services to clients
linked to ‘financial instruments’
(shares, bonds, units in
collective investment schemes
and derivatives), and the
venues where those
instruments are traded.
3 Europe European Securities & Markets
Organization (ESMA)
(www.esma.europa.eu)
One mission: to enhance investor
protection and promote stable
and orderly financial market
Three Objectives: Investor
Protection, Orderly Markets and
Financial Stability
International Accounting
Standards (IAS) Regulation
EMIR
European Market Infrastructure
Regulation on derivatives,
central counterparties and
trade repositories (EMIR)
MiFID II
The Markets in Financial
Instruments Directive is the EU
legislation that regulates firms
who provide services to clients
linked to ‘financial instruments’
(shares, bonds, units in
collective investment schemes
and derivatives), and the
venues where those
instruments are traded.
((various European Union exchanges))
4 Singapore Monetary Authority of Singapore
(MAS)
(www.mas.gov.sg)
“….to develop and enforce rules
and regulations with a view to
building an enduring
marketplace….”
Securities and Futures Act Singapore Exchange (SGX)
5 Hong
Kong
Securities & Futures Commission
(www.sfc.hk)
Mission: As a financial regulator
in an international financial
centre, the SFC strives to
strengthen and protect the
integrity and soundness of Hong
Kong's securities and futures
markets for the benefit of
investors and the industry.
Securities and Futures
Ordinance (SFO)
The Stock Exchange of Hong Kong Limited
(HKEX)
6 India Securities and Exchange Board of
India (SEBI)
(www.sebi.gov.in)
The Preamble "...to protect the
interests of investors in securities
and to promote the development
of, and to regulate the securities
market and for matters
The Securities Contracts
(Regulation) Act, 1956 [As
amended by Finance Act, 2017]
The Depositories Act, 1996 [As
amended by Finance Act, 2017]
The Securities Laws
(Amendment) Act, 2014
Securities & Currency Exchanges
BSE Ltd (BSE)
National Stock Exchange Ltd (NSE)
Metropolitan Stock Exchange of India Ltd
(MSEI)
Commodity Exchanges
Multi-Commodity Exchange (MCX)
National Commodity Exchange (NCDEX)

9. pg. 9
connected there with or
incidental there to".
Indian Commodity Exchange (ICEX, with
NMCE merged)
Rajkot Commodity Exchange Ltd
The Chamber of Commerce, Hapur
Depositories
CDSL India, NSDL India
7 South
Korea
Financial Services Commission
(FSC)
(www.fsc.go.kr)
Financial Investment Services
and Capital Markets Act
(FSCMA), 2005
Korea Exchange (KRX)
(KOSPI, KOSDAQ, KONEX Markets)
8 Japan Financial Services Agency (FSA)
(www.fsa.go.jp)
Financial Instruments and
Exchange Act (Act No. 25 of
1948, revised up to Act No. 99
of 2007)
Fukuoka Stock Exchange
Japan Exchange Group
JASDAQ Securities Exchange
Nagoya Stock Exchange
Osaka Securities Exchange
Tokyo Stock Exchange
2.4.1.2 Exchanges & Market Intermediaries
Between the Investors, Borrowers & a Market eco-system, there exists a complex network of service
providers, called Market Intermediaries. Most of them can be broadly classified as,
1. Major Intermediaries
a. Exchanges
b. Stock Brokers (& Sub-brokers)
c. Depositories
d. Clearing Corporations
2. Other Intermediaries
a. Registrar & Transfer Agents
b. Merchant Bankers
c. Underwriters
d. Portfolio Managers
e. Mutual Funds
f. Credit Research Agencies
g. Financiers
h. Venture Capitals
2.4.1.3 Role of Exchanges as Self Regulated Organizations (SROs)
Globally, almost all Stock Exchanges are classified as Self Regulatory Organizations (SROs).
As an SRO, their tasks include multiple areas of administration & they are supposed to exercise the
highest degree of oversight, that is under the umbrella of the securities regulation frameworks.
Taking advantage of the market knowledge, depth & expertise of market operations & best
practices, they have a definitive edge over the Government Regulators. They are also in turn more
flexible & able to respond to markets’ changing requirements more quickly. However, though the
SROs are separate as well as distinct from the Government Regulators, the Regulators still exercise
overall oversight & authorisation.

10. pg. 10
Over a period of time, apart from the basic functions of issuing of rules for listing, trading,
disclosures of corporate actions, de-listing etc., they have also shared enforcement responsibilities
along with supervisory agencies as well as monitoring the effective compliance of legislations. The
Organisation for Economic Co-operation and Development (OECD), has further introduced &
promulgated the Principles of Corporate Governance for Stock Exchanges – which have broadened
the role of Stock Exchanges towards development of the recommendations of Corporate
Governance as well encourage adoption by the listed companies.
Thus, as SROs, the Stock Exchanges have a high degree of responsibility for oversight with their
respective competence, as well as ensuring standards compliance of fairness & confidentiality –
which are equal in measure to the Regulators.
Ethiopis Tafara, the then SEC Chairman of the Public Interest Oversight Board Monitoring Group, in
2005 has rightly said that “….the Advantages of Self-Regulation are - Technical Expertise, Flexibility,
Greater Acceptance of Rules & Cost Savings to Federal Government…..”
2.4.1.4 Depositories (& Custodians)
Depositories are Market Intermediaries that are entrusted with the sole responsibility to
keep/hold/maintain shares/securities on behalf of the owners of the shares/securities. These
shares/securities may be either in Physical Certificate form or in De-materialized form. The direct
result of the Depositories’ function is a simple book-keeping type entries for Transfer of ownership.
Indirect benefit is the availability of ownership records – which is useful for regulatory statistics, as
well as availability guarantee towards an order/trade of a seller.
Domestic Depositories generally settle trades for a country/region. However, International
Depositories settle the trades of International securities e.g. Eurobond etc.
Many Banks & Financial Institutions often act as Custodians, wherein they keep/hold/maintain the
shares/securities on behalf of their customers (but they do not have ownership of the
shares/securities).
2.4.1.5 Clearing Corporations
Clearing Corporations are Market Intermediaries that are associated with the Exchanges. They
ensure that Exchange transactions are settled promptly & efficiently. They act as a buyer to the
seller & vice versa i.e. taking an offsetting position with each client in each transaction. Thus Clearing
Corporations handle confirmations, settlement of transactions, & fulfilment of transactions.
In some markets, clients are netted to a broker and a broker maintains a single netted position with
the clearing corporation. Broker positions are netted at the exchange level by the clearing
corporation.
2.4.1.6 Demutualization
Since most Stock Exchanges started as groups of traders who came together, the ownership
structure more or less remained as a Mutually Owned entity. However with changing times &

11. pg. 11
towards the need of prevention of conflict of interest, Stock Exchanges started getting Demutualized
around the 1990s. Another major benefit of Demutualization was the flexibility of improvement in
governance structures, which ultimately leads to greater investor participation, global participation
& global recognition.
The Stockholm Stock Exchange was the first to get demutualized, in 1993. This was followed by many
major stock exchanges viz. Chicago Mercantile Exchange, Australian Stock Exchange, New York Stock
Exchange, London Stock Exchange, Singapore Stock Exchange, Deutsche Börse, Bombay Stock
Exchange, Toronto Stock Exchange – to name a few.
2.4.2 Participants - Investors (Individuals, Institutions, Traders) & Borrowers (Listed Companies &
Securities)
2.4.2.1 Investors are broadly classified as Individual Investors & Institutional Investors
Individual Investors
An Individual investor in a particular Market can be - Citizens, Non-Resident Citizens, Persons of
Same-Country-Origin but Citizens of another-Country, Foreign Individuals (cross-border) and so on.
Institutional Investors
An institutional investor is an entity which pools money to purchase securities. Institutional investors
may include banks, insurance companies, pensions, hedge funds, REITs, investment advisors,
endowments, and mutual funds.
These may belong to the same country/region OR can be Foreign Institutional Investors.
Traders (& jobbers)
A trader is an individual (or a broker/broker-affiliate), who participates in the Stock/Securities
trading for self benefit with sole intention of short-time profit making. Similarly, traders who trade in
a selective stock/security are also known as jobbers. In some markets, when a Broker Member
trades on its own account, it is known as proprietary trading or a proprietary order-book. (often
abbreviated as “prop-desk”).
2.4.2.2 Investors – Direct Participation v/s InDirect Participation
In major markets - to access the market, an investor has to place the orders through a stockbroker
i.e. InDirect Participation.
Direct Market Access (DMA) refers to the platform or mechanism whereby an
individual/institutional-investor can enter their limit orders directly into the market. However, the
broker is responsible for all orders submitted by or through it to the order book and will have
controls in place to help prevent erroneous orders from being submitted.

12. pg. 12
2.4.2.3 International Participants (Cross Border)
Participation
Foreign Citizens, Non-Resident Citizens, Persons of Country-Origin but Other-Country-Citizens,
Foreign Institutional Investors –of all major markets - are permitted to invest/participate in
international (other country) stock exchanges, subject to investment (& tax) regulations &
limitations of both countries. They can participate by opening investor/trading accounts with
Brokers who have membership with the respective international (other country) Stock Exchanges.
An investor from a country further has 2 options to buy stocks of a foreign company – one option is
by opening an investor/trading account with a broker in the foreign country, & another option is that
the foreign company can either list its stocks in an exchange of the investor’s country. The foreign
company may also list a Global Depository Receipt (GDR) or an American Depository Receipt (ADR)
or an European Depository Receipt (EDR) in an exchange of the investor’s country. A Depository
Receipt thus is an international certificate which has underlying shares listed abroad in the parent
market exchange, which is available to be traded in the local market exchange of an investor.
Impact of Forex fluctuations
All transactions by an investor in a foreign country are traded in the local currency of the foreign
exchange. The investor gets to bear the profit/loss of Forex fluctuations at the time of
depositing/withdrawing funds from the investor’s trading accounts from/to their local/personal
bank accounts.
2.4.2.4 Borrowers
Companies that list their Shares, Bonds, Depository Receipts on a Stock Exchange are the Borrower
Participants of the Exchange. When a company (or entity) lists its shares, bonds or depository
receipts on an exchange, they effectively raise capital from the market. The investors thus become
capital providers by becoming share-holders, bond-holders of the company. The companies are
subject to listing guidelines & regulations, wherein a primary responsibility of the company towards
the share-holders is profit-sharing by way of issuing dividends.

13. pg. 13
2.4.2.5 Illustration – Key International Bodies, Exchanges & Market Intermediaries, Participants
(Investors & Borrowers)
2.4.3 Policies, Processes & Frameworks
2.4.3.1 Registration of Market Intermediaries – Exchanges, Brokers, Institutions, Investors
Market Intermediaries are generally registered (& regulated), as illustrated below,

14. pg. 14
2.4.3.2 KYC, common KYC, e-KYC & KYC++
Know your customer (KYC) has been adopted by all Major Markets. It is primarily a process wherein
a market intermediary is responsible to verify identity of the clients that open either an investor
trading account or an investor depository account. As a Client, an investor gets protection since their
investment advisors get to know the profile & risk appetite of the client. At the same time the
advisors get protection with the knowledge of what they can include or exclude from the portfolio of
their client.
3 types of KYC models are observed/in-practise – KYC, Common KYC & e-KYC. Additionally, a KYC++
model is also evolving in Singapore market.
In USA markets, the SEC has approved a FINRA Rule for KYC (known as the FINRA Rule 2090) -
wherein the intermediary has to exercise reasonable diligence while opening as well maintaining
each client account. In order to be able to do this, the intermediary is required to gather mandatory
essential facts of each client. It is further a mandatory obligation at the beginning of a relationship
with the client & the gathered knowledge also applies during servicing of the customer’s account as
well as towards special handling instructions of the account. The KYC obligation does not depend on
whether the broker makes any recommendation or not to the customer.
In UK, the regulator FCA has an exclusive KYC HandBook (Know Your Customer COB 5.2). In its
HandBook FCA states that before giving any recommendation to a customer concerning a
designated investment or if acting as an investment manager, a firm must take steps that are
reasonable enough to ensure that the firm possesses sufficient financial & personal information of
the customer. Also, if the firm provides continuous/periodic advises to the customer on an ongoing
basis then the firm should regularly review its KYC information about the customer, & if the firm
provides occasional advise to the customer then the firm should undertake a review each time.
Depending on the investment market-type, Record keeping is mandated for a period ranging from 3
years, 6 years, & indefinite.
In Europe, the ESMA Committee Of European Securities Regulators (CESR) has introduced a
Standard, that states that an investment firm has to possess adequate documentation about each
customer’s identity & the identity plus legal capacity of the customer’s representatives (if any) for
the first time as well as throughout the period that the firm has a business relationship with the
customer. The ESMA Standard also permits an investment firm to re-use the KYC of a customer that
was generated by the customer with another investment firm. It also adds a strict caution related to
AML that upon obtaining any evidence of the customer using the financial system for money
laundering purpose, the firm should not provide any investment related services to the customer.
In Singapore, under the KYC section of the Securities & Futures Act, MAS guidelines state that a
financial institution should have reasonable understanding of the customer which should include
their personal as well as professional backgrounds including their sources of wealth in possession &
their business activities. In case of corporate entity customers, the financial institution should also
identify the appropriate beneficial owner(s) of the corporate entity. It further applies a stringent
guideline, such that if the financial institution is unable to reasonably ascertain whether the
customer or beneficial owners’ wealth is legitimate, then they should not establish any business
relations with the customer.
In Hong Kong, SFC’s circular “Know Your Client and Account Opening Procedures” states that all
Market Intermediaries should take reasonable steps such that they are able to establish the true &

15. pg. 15
full identity of each client as well as the financial situation & the investment objectives plus
experience of the client. These steps are provided in an extensive Code of Conduct guideline.
Additionally, SFC also adds a strict caution that if a common third party emerges as being authorised
by multiple un-related clients then the intermediary is required to conduct an active enquiry as well
as a critical evaluation of the reasons & then further monitor these un-related clients’ accounts for
irregularities.
In India, SEBI has periodically updated the KYC requirements, & after taking feedback from various
market participants, it has recently released a regulation, namely - Uniform Know Your Client (KYC)
Requirements for the Securities Markets. SEBI has simplified the account opening process by stock
brokers for investor clients and prescribed a standard KYC form. This form captures all the necessary
basic details of the client in Part I. Additionally all information which is specific to the dealings in the
respective type of exchange(s) is captured in Part II.
KYC models
Thus, in major markets, the following 3 models of KYC are observed
• KYC - (independent) model is observed in all major markets.
• Common KYC model has been observed in India.
• e-KYC model has been observed in India & Singapore.
Additionally, a KYC++ model has been recently proposed (& is under a pilot run) in Singapore.
These KYC models can be illustrated as below,
• KYC

16. pg. 16
• Common KYC
• e-KYC
Benefits of Common KYC,
1. To Investors - Not required to keep copies of KYC Documents, Not required to submit KYC
Documents multiple time, Can Update their KYC details through any one intermediary only
2. To Intermediary - Details of Investors can be fetched from Common KYC service provider –
the KRA, Auto updates are received from KRA. Client details will always be updated/current
3. To Regulators - Single source of KYC information, Can track clients across all Intermediaries,
Access restricted to Intermediaries registered with regulator. Prevents any possibilities of
misuse of client documents.
(by Cyrus Khambata, M.D. CVL India)
2.4.3.3 Risk Rating, Risk Containment, Anti-Money Laundering (AML) and Countering the Financing of
Terrorism (CFT)
(NOTE: CFT – is also referred to as “Combating the Financing of Terrorism”, by IMF)
2.4.3.3.1 Risk Rating, Risk Containment
Coupled with KYC - Risk containment measures like Risk Rating, Customer Due Diligence (CDD) are
effectively practised for AML & CFT. All Major Market regulators guide/regulate/enforce AML &
CFT policies on all Market Intermediaries. Parallelly, the Banking system has strict

17. pg. 17
implementations for effective AML & CFT. Various National & International bodies provide
guidance, policies, regulations; & conduct supervisions, reviews & assessments.
Risk Rating & CDD are the processes wherein the intermediaries collect and systematically evaluate
a customer’s profile for any pertinent information that may be a potential case/purpose of money
laundering &/or a terrorism financing red flag. Upon completion of due diligence, the customer is
then given a risk rating. An example of a risk rating can either be a simple low/medium/high or a
numeric value derived from a complicated risk matrix listing out the score based on a specific set of
criteria. Political affinity/exposure/participation/funding/fund-raising is another dimension of the
risk matrix.
This risk rating then helps an intermediary to make a decision as to how & when they should apply
further stringent checks & controls, as well as treatment of the risk to the specific groups of risk
rated customers. This approach is known as a risk based approach & appropriate resources are then
allocated towards the risk management process.
Regulators in Major Markets caution intermediaries to keep an eye for clients who enter into
transactions beyond their know financial income/strengths/means. This may be true for new clients
or may be a sudden spurt exhibited by existing clients. These are to be flagged & immediately
reported to the regulators for suspected financial irregularities.
2.4.3.3.2 Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT)
International Monetary Fund (IMF) states that indulging in Money laundering and generating finance
towards use for terrorism are crimes of financial nature that have huge negative impact on
economy/economies.
Money Laundering effectively is the conduct of an underlying crime with a profit making objective -
such as drug trafficking, manipulation of financial markets, tax evasion, corruption, black marketing
etc. These crimes have an intent towards concealing the profits/financial-outcomes & to also further
such enterprises of criminal nature. This results in the diversion of financial flows/resources being
taken away from the socially & economically productive monetary systems. This has a huge negative
impact on internal as well as external financial, social & economic stability of countries/regions.
Economies & societies are corroded & corrupted as a result. To counter these negative
consequences, IMF actively sets standards & guidelines as well as conducts reviews & assessments
for AML/CFT.
IMF promotes the view that when adequate AML/CFT controls are effectively implemented, they
can enormously counter as well as mitigate the negative impact of financial criminal activity, & this
positively promotes the integrity as well as provide stability in the world’s financial markets.
“Effective anti-money laundering and combating the financing of terrorism regimes are essential to
protect the integrity of markets and of the global financial framework as they help mitigate the
factors that facilitate financial abuse.”
Min Zhu, Deputy Managing Director of the IMF
IMF conducts periodic AML/CFT reviews & assessments of the countries which are its members, for
compliances as per the recommendations in the FATF 40+9 international standard. During such
assessments the IMF review the legal framework as well as the related supervisory controls of the
country. The strengths & weaknesses of the implemented systems are thus identified.
Recommendations are then made towards correction of the deficiencies that emerge.

18. pg. 18
A consolidated Detailed Assessment Report (DAR) is then made which details the analysis of the
legal framework, & also rates the country’s compliance levels against the FATF standard. A summary
of the main findings/observations of the DAR is then recorded in the Report on the Observance of
Standards and Codes (ROSC).
Apart from IMF, the other International Organizations and Bodies that set Standards & Guidelines
for enforcement as well as reviews & assessments of AML & CFT, are,
1. Financial Action Task Force (FATF)
2. Basel Committee on Banking Supervision
3. Council of Europe
4. Egmont Group of Financial Intelligence Units
5. European Union (EU)
6. International Association of Insurance Supervisors (IAIS)
7. International Organization of Securities Commissions (IOSCO)
8. INTERPOL
9. Offshore Group of Banking Supervisors (OGBS)
10. United Nations Office on Drugs and Crime (UNODC)
11. United Nations Counter-Terrorism Committee and Executive Directorate (UNCTED)
12. World Bank
2.4.3.4 Risk Management
All Major Markets have very mature practices for Risk Management, towards the goal of minimizing
risks & maximizing profits for investors, protection of investors as well as ensuring market integrity.
In USA, the SEC has a separate unit for Risk Management processes, called the Office of Compliance
Inspections and Examinations (OCIE). The OCIE conducts examination under a program called the
SEC’s National Exam Program (NEP). This program’s primary objective is improvement of
compliance, prevention of fraud & monitoring of risks.
In UK, the FCA HandBook for Risk Control mandates financial firms to have effective processes
towards the identification, management, monitoring & reporting of all the possible risks that the
firm is/might-be exposed to. A firm has to also set its level of Risk tolerance. FCA also advocates
Reverse Stress Testing of strategies, policies & procedures.
In Europe, ESMA has laid down guidelines for Compliance Risk Assessment, Monitoring obligations of
the compliance function, & Reporting obligations of the compliance function. Each firm is mandated
to have a compliance function which should have a risk based approach. Independent resources are
required to be allocated towards risk management.
In Singapore, the MAS has an umbrella guidance on sound risk management practices which covers
the entire gamut of financial services in the country - that covers markets as a whole, liquidity in
markets, credit issuance, operational risks, insurance business, & technology. The guidelines specify
the role of Boards for oversight, role of senior management towards ensuring
policies/processes/systems, presence of processes & procedures which are adequately competent,
& requirement of competent personnel.

19. pg. 19
In Hong Kong, the SFC has a centralised unit which is responsible for overseeing risk strategies & risk
management. This has a statutory objective of reduction in systemic risks as well as maintaining of
financial stability. Maintaining liquidity of funds towards meeting redemption requests of investors,
fair treatment of investors, & maintaining robustness and integrity of markets are highlighted.
In India, SEBI has laid down comprehensive regulations for Risk Management & puts the onus of
Exchanges to create a framework & enforce it market-wide. SEBI mandates that Exchanges should
have an adequate as well as effective risk management mechanism towards creating a risk
management framework that would ensure safety & security of the markets that can function with
smooth & orderly completion of the settlement of market transactions.
It further lists detailed regulations in – Capital Adequacy, Base Minimum Capital, Additional Base
Capital, Values of Securities to be maintained, Upper Limits, Online Position Monitoring Systems, &
non-compliance.
2.4.3.5 Types of Orders
In Major Markets - the most common types of orders are market orders, limit orders, and stop-
loss orders.
• A market order – to execute immediately, with a guarantee of execution, but without
guarantee of the execution price.
• A limit order – to execute at a limit-specified price (or even a better price). A buy limit order
may be matched either at the limit price or lower, & a limit order for sell may be matched at
the limit price or higher.
• A stop-loss order - to execute either a buy or sell only if the price reaches the specified price.
This specified price is known as the stop price. The order becomes a market order once the
stop price is reached.
Apart from the above, Exchanges & Brokerage houses have introduced other variants for finer
convenience & control of investors, like,
• Immediate or Cancel (IOC)
• After Market - Opening session orders
• Stop orders to open
• Trailing stops
• Slippage
• Attaching a stop
• Stop orders to open
• Good Till Cancelled
• Good till a specified time
• Good Till EOD
• Good Till EOS
• Auto Square Off (EOD or EOS)
• But today Sell Tomorrow (BTST)
• Net Continuous

20. pg. 20
2.4.3.6 Measures to ensure Fair Market Price (prevention of Price Manipulation)
a. Call Auction (Price Discovery), & Periodic Call Auction
Call Auction is a process where buy & sell orders are placed, pooled, & then the best
price is computed at which most orders would match, wherein buyers may also get
trades at a lower price (that they has offered) & sellers may also get trades at a
higher price (that they had quoted). Balance orders are either dropped, or continued
in the order book in continuous trading sessions. Such call auctions are often held
before the beginning of trading sessions as a Price Discovery mechanism. Many
exchanges also hold call auctions at more frequent intervals during trading sessions,
called Periodic Call Auctions.
b. Circuit Breakers (to restrict impact of mass euphoria)
All Major Market Exchanges apply Circuit Breakers in both Upward & Downward
directions, mostly as a fair +/- percentage value applicable to the day’s/session’s
Opening Price (of a scrip/stock/instrument) and/or even to the whole exchange by
applying Circuit Breaker to the Exchange Index/Indices. Trading is stopped for a pre-
defined period (generally a few minutes) at the last traded high/low price when the
circuit limit was hit. It is observed that, unless there are genuine reasons for a stock
price to break a circuit more than once, either upwards or downwards, the circuit
breakers definitely help in cooling down the mass euphoria sentiment.
c. Prevention of Insider Trading (to prevent unfair advantages)
• All Major Markets have multi-level regulations for people who may possibly get
privy to information related to listed stocks, which if used inappropriately, may
result in unfair advantages to whoever uses the information to trade in the
stocks.
• Most regulators require key management personnel of intermediaries, listed
companies, auditors, accountants, legal advisors etc. to declare their
investments (& also investments made by their immediate/extended family), on
a periodic basis. These declarations are subject to regulatory scrutiny.
• Many listed companies have also implemented black-out dates during which
their employees have to compulsorily stay away from trading in their own
stocks. These black-out dates are usually around earnings announcements.
d. Prevention of Front Running (& Tail Gating)
• Brokers (or their traders) who may get privy to advance information regarding a
possible large stock purchase/sell order expected from a client, may take a
position in the stock to gain from the price fluctuation due to the impact of the
clients’ order.
• Another version of Front Running is called Tail Gating wherein a broker (or
trader) follows a clients’ order & trade immediately with his own trade to
benefit from the impact of the clients’ trade.
• Both Front Running & Tail Gating are prohibited, and largely covered under the
Prevention of Insider Trading.

21. pg. 21
2.4.3.7 Payment v/s Delivery (PvD) and Delivery v/s Payment (DvP)
a. Payment v/s Delivery (PvD)
Major Markets have traditionally followed a Payment v/s Delivery mechanism. NET
position Payment is initiated from Buyer & then NET position Delivery is executed from
Seller.
b. Delivery v/s Payment (DvP)
However some Markets, have successfully developed & adopted the more secure
Delivery v/s Payment mechanism. Delivery is marked as “BLOCKED” at Depository
against the Sellers’ NET Position towards the Brokers’ Trading Account & then Payment
is released from Funds from the Brokers’ Trading Account with the Clearing Accounts.
In both cases, regulators ensure processes that provide guarantee of Payment as well as delivery, i.e
the risks of non-delivery or non-payments are well mitigated.
2.4.3.8 Market data - dissemination & revenue
Orders that are submitted to an exchange go into the order book of the exchange. Orders that are
matched by the Exchange’s matching engine become Trades. These orders & trades are called the
Market Data.
It is vital for Exchanges to disseminate (transmit) the Market Data to the Market Trading terminals,
with shortest possible latency, such that the traders/investors (participants) can react &
add/modify/delete their orders to keep in-step with the changing market. It is observed that
trader/investor participation is directly proportional to the higher quantum & lower latency of
Market Data disseminated by an Exchange. Exchanges often provide various streams (flavors) of
Market Data to cater to the variety of data consumers – low, medium, high. The highest variants
which carry each order & trade at the lowest latency are called tick-by-tick (or near tick-by-tick).
Revenue
• Exchanges directly or indirectly generate revenue by charging variably for these Market Data
Streams.
• OHLC data (daily, historic – Open High Low Close) - Traditionally, Exchanges publish daily &
historic Open High Low Close (OHLC) data of listed scrips. This is subscribed to by market
participants, financial institutions, research organization etc. as an authentic source. This is a
revenue stream for all Exchanges.
2.4.3.9 Order log store, Transaction log store
Regulators require exchanges to store the Order Logs & Trade logs. These logs can be called for
during RCAs and regulatory, federal, criminal, govt, taxation etc. investigations. Some Regulators
require exchanges to share their daily order & trade logs, such that the regulators replay the Market
Movement of each day & run analysis to identify any abnormalities in trading patterns.
2.4.3.10 Risk & Recovery mechanisms
Information Security Management System (ISMS), & Disaster Recovery (DR) are mandated for
market intermediaries in all Major Markets.

22. pg. 22
ISMS helps to put in place effective controls & processes towards all aspects of managing & ensuring
the security of Information Technology assets of the intermediaries.
DR ensures that the systems & software of the intermediaries are available from alternate locations,
should the primary location encounter a failure or outage.

23. pg. 23
2.5 FOUNDATION
The Key Foundations of Traditional Stock (& Securities) Exchanges are – Wealth of Investors &
Health of the Market Intermediaries (some intermediaries are also classified as Market
Infrastructure Intermediaries).
Highest level of Trust & Integrity in the entire eco-system is of utmost importance.

24. pg. 24
3 REFERENCES
3.1 TRADITIONAL EXCHANGES
3.1.1 Key International Bodies
1. World Federation of Exchanges
2. International Organization of Securities Commissions (IOSCO)
3.1.2 Role of Exchanges as Self Regulated Organizations (SROs)
1. Objectives and Principles of Securities Regulation
[International Organisation of Securities Commission (IOSCO), in May of 2003]
2. Self-Regulation in Securities Markets
[Self-Regulation in Securities Markets, January 2011
By John Carson, Policy Research Working Paper 5542, The World Bank]
3. Advantages of Self-Regulation
By Ethiopis Tafara, 2005,
then SEC Chairman of the Public Interest Oversight Board Monitoring Group.
now, General Counsel & Vice President for Compliance Risk & ESG Sustainability, IFC -
World Bank Group
4. THE TRADITIONAL ROLE OF EXCHANGES IN CORPORATE GOVERNANCE
[Hans Christiansen and Alissa Koldertsova
Financial Markets Trends, OECD 2008]
5. SELF-REGULATION IN THE SECURITIES INDUSTRY:
THE ROLE OF THE SECURITIES AND EXCHANGE COMMISSION
Richard W. Jennings, 1964
[Professor of Law, Emeritus – Berkeley
Fulbright professor at Tokyo University
Mentor to an influential group of young law professors in Germany in the mid-1950s,
who helped add securities regulation to the academic agenda there as Germany
developed into an economic power]
3.1.3 KYC and eKYC & Anti-Money Laundering (AML) and Countering the Financing of Terrorism
(CFT)
1. Wikipedia
2. FINRA Rule 2090. Know Your Customer (as approved by SEC)
3. NYSE Rule 405, erstwhile.
(This was replaced by Finra Rule 2090, effective May 2016)

25. pg. 25
4. FSA - Financial Services Authority
Discussion Paper #22, of August 2003
Know Your Customer – statements of good practice
5. Financial Action Task Force – The Forty Recommendations (June 2003)
Customer Due Diligence and Record-keeping (extract)
6. The Joint Money Laundering Steering Group Guidance Notes (December 2001)
Basic Principles and Objectives of Money Laundering Prevention and Compliance
7. Basel Committee on Banking Supervision
Customer due diligence for banks (October 2001)
8. Wolfsberg AML Principles
Global Anti-Money-Laundering Guidelines for Private Banking (May 2002)
9. FCA
FCA Handbook
10. ESMA - CESR [THE COMMITTEE OF EUROPEAN SECURITIES REGULATORS]
CESR/01-014d
THE “KNOW-YOUR-CUSTOMER STANDARD” AND THE DUTY TO CARE
11. MAS Securities and Futures Act
12. eKYC in Singapore, & KYC++ [News Article, March 2017]
13. SFC - Circular number 15EC28
Circular concerning Know Your Client and Account Opening Procedures
12 May 2015
14. SEBI - Uniform Know Your Client (KYC) Requirements for the Securities Markets
October 2011
15. SEBI – eKYC Master Circular
Oct 2013
16. SEBI - Common KYC
(as implemented in India Market by CVL India)
(presented by Cyrus Khambata, M.D. of CVL India, at ASIFMA 2016, Hong Kong)
17. International Monetary Fund (IMF)
3.1.4 Risk Management
1. SEC - Office of Compliance Inspections and Examinations (OCIE)
2. FCA – Risk Control HandBook SYSC 7

26. pg. 26
3. ESMA - guidelines under article 16(3) of the ESMA Regulation covering certain aspects of
the MiFID compliance function requirements.
4. MAS - Guidelines on Risk Management Practices
5. SFC - centralised unit on risk management
6. SEBI - Model Bye-Laws for Risk Management, Chapter-10