Reliance Securities A Reliance Capital Company

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Reliance Securities

A Reliance Capital Company Risk Management Policy

April 25, 2013

SEBI, vide its circular ref. no. SEBI/MRD/DoP/SE/Cir-07/2005 dated February 23, 2005 has advised the Stock Exchanges that the Stock brokers should have a prudent system of risk management to protect themselves from client default.

In view of the above, Reliance Securities Limited (RSL), as a stock broker, has adopted the following system of risk management:

The Risk Management Policy has been framed for the benefit of our customers to minimize the risk of loss. As our valued customer, we are committed to protect you from various kinds of risks involved related to investments in securities markets. This policy should be seen as a measure towards risk containment and not as an insurance against losses. The policy is subject to change depending upon the risk perceptions of the market and changes in SEBI/Exchange regulations.

Investment in securities - Risks involved.

1.) Market (systematic) Risk - The market risk or price risk is the potential fluctuation in the value of a financial instrument. This explains the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, also called

"systematic risk," cannot be eliminated through diversification, though it can be hedged against.

2.) Unsystematic risk – The risk involved with the performance of specific security owing to several factors like creditworthiness of the company, corporate governance practices, news(event) related factors, stock-specific issues etc. Such risks can be diversified by effective portfolio allocations.

Risks in order placement

Order placement is the request by a client to buy or sell financial instruments. Buy or sell orders must at least indicate the number / par value of which financial instruments are to be bought or sold at what price.

1. Market order

By marking "market order" (without limit price) on the order, the client accepts any possible price; the buy price or sell price is uncertain. Market orders are customarily processed immediately or in accordance with the practice of the trading centre. Best bid price or the best offer price is not guaranteed in a market order.

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2. Limit order

With a "buy limit", one can limit the buy price of an order and thus the capital invested (upper limit price); i.e., no purchases will be carried out above the limit price. With a "sell limit", one can specify the lowest acceptable sell price (lower limit price); i.e. no sales will be carried out below the limit price.

However the execution of the order is not certain in a limit order.

3. Stop-loss Market Order

This order type allows a trader the ability to add to their position if the market rises or to sell shares if the market declines. With buy orders the stop price is above the current market price. A sell stop order is placed below the current market price. Once the trigger price of a stop order is hit the order (a buy or a sell) becomes a market order. Again, the execution of the order depends on the stop order price and once the price of stop order is hit, the best bid price or the best offer is not guaranteed as it becomes a market order.

4. Stop-loss Limit Order

In this case, the stop-loss order becomes a limit order after the trigger price of stop order is hit. The execution of the order is not certain.

5. Immediate or Cancel (IOC) Order

These orders are immediately traded or cancelled by the exchange. The execution of the order is highly uncertain in this case.

BASIC RISKS:

1. Risk of Higher Volatility:

Volatility refers to the dynamic changes in price that a security/derivatives contract undergoes when trading activity continues on the Stock Exchanges. Generally, higher the volatility of a security/derivatives contract, greater is its price swings. There may be normally greater volatility in thinly traded securities / derivatives contracts than in active securities /derivatives contracts. As a result of volatility, your order may only be partially executed or not executed at all, or the price at which your order got executed may be substantially different from the last traded price or change substantially thereafter, resulting in notional or real losses.

2. Risk of Lower Liquidity:

Liquidity refers to the ability of market participants to buy and/or sell securities / derivatives contracts expeditiously at a competitive price and with minimal price difference. Generally, it is assumed that more the numbers of orders available in a market, greater is the liquidity. Liquidity is important because with greater liquidity, it is easier for investors to buy and/or sell securities / derivatives contracts swiftly and with minimal price difference, and as a result, investors are more likely to pay or receive a competitive price for securities / derivatives contracts purchased or sold. There may be a risk of lower liquidity in some securities / derivatives contracts as compared to active securities / derivatives contracts. As a result,

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your order may only be partially executed, or may be executed with relatively greater price difference or may not be executed at all.

Buying or selling securities / derivatives contracts as part of a day trading strategy may also result into losses, because in such a situation, securities / derivatives contracts may have to be sold / purchased at low / high prices, compared to the expected price levels, so as not to have any open position or obligation to deliver or receive a security / derivatives contract.

3. Risk of Wider Spreads:

Spread refers to the difference in best buy price and best sell price. It represents the differential between the price of buying a security / derivatives contract and immediately selling it or vice versa. Lower liquidity and higher volatility may result in wider than normal spreads for less liquid or illiquid securities / derivatives contracts. This in turn will hamper better price formation.

4. Risk of News Announcements:

News announcements that may impact the price of stock / derivatives contract may occur during trading, and when combined with lower liquidity and higher volatility, may suddenly cause an unexpected positive or negative movement in the price of the security / contract.

5. Risk of Rumors:

Rumors about companies / currencies at times float in the market through word of mouth, newspapers, websites or news agencies, etc. The investors should be wary of and should desist from acting on rumors.

6. System Risk:

High volume trading will frequently occur at the market opening and before market close. Such high volumes may also occur at any point in the day. These may cause delays in order execution or confirmation.

6.1 During periods of volatility, on account of market participants continuously modifying their order quantity or prices or placing fresh orders, there may be delays in order execution and its confirmations.

6.2 Under certain market conditions, it may be difficult or impossible to liquidate a position in the market at a reasonable price or at all, when there are no outstanding orders either on the buy side or the sell side, or if trading is halted in a security / derivatives contract due to any action on account of unusual trading activity or security / derivatives contract hitting circuit filters or for any other reason.

7. System/Network Congestion:

Trading on exchanges is in electronic mode, based on satellite/leased line based communications, combination of technologies and computer systems to place and route orders. Thus, there exists a possibility of communication failure or system problems or slow or delayed response from system or trading halt, or any such other problem/glitch whereby not being able to establish access to the trading system/network, which may be beyond control and may result in delay in processing or not processing buy or sell orders either in part or in full. You are cautioned to note that although these problems may be temporary in nature, but when you have outstanding open positions or unexecuted orders, these represent a risk because of your obligations to settle all executed transactions.

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Assigning Trading Limits

Margin/Deposit based limits are assigned to the customers for trading purpose. Margin specified by the company is blocked at scrip level on the positions taken by the clients during the day.

 Trading limits are given based on the margin available with Reliance Securities. Margin available includes cash or collateral holdings. The net collateral which is the gross collateral after haircut is considered while calculating margin. The haircut rates are decided by Reliance Securities.

 If there is a shortfall in the margin, the same is communicated to the client. In this case, either the client is required to fund the account by depositing money or the client has to reduce the positions so that the funds can be released.

 The clients will regularly receive alerts in case of margin shortfall or MTM losses. The shortfall will be shown on the trading terminal or will be sent via SMS/Email.

Reliance Securities may depending on its own risk perception and without informing the Client, in its sole discretion, change the margin requirement for any particular scrip at any time.

In case of upward revision of the margin requirement either by the Exchange or Reliance Securities, the client is required to provide the required additional margin to continue with the open position. If the available margin is not sufficient to meet the demand for additional Margin and in case of any shortage, Reliance Securities may close out all or any of the open positions at its discretion. However, before deciding to place the square off order(s) Reliance Securities may at its discretion cancel all or any of the pending orders.

Reliance Securities may or may not inform the client that the client’s margin available has fallen below the required level. It shall be the responsibility of the client to regularly monitor and review the margin availability and furnish the additional margin to Reliance Securities online through the website. Client accepts that Reliance Securities has the right to close out the open position at any time (without informing the client) in case the client does not satisfy the additional margin requirements.

On the contract expiry day, the position would be closed at the settlement price. All the ‘In-the -money’

contracts will get automatically assigned. Margin blocked on expired position will be released and the trading limits would be appropriately increased after adjusting for realized profit/loss on close out.

Option premium receivable may be made available to the client for further trading only on T+1 day. Reliance Securities may allow trading in selected option contract at its discretion.

In case client has opted for the limit card scheme, on trade execution and/or on the assignment or exercise of the options contracts, the client’s limit card limit will get reduced by the contract value which is equal to quantity multiplied by the Strike price plus the premium, if any.

Reliance Securities reserves the right to either temporarily or permanently, withdraw or suspend the Futures & options trading facility provided to the client at any time on observing the suspicious nature of trading by the client.

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Type of products and associated risks a. Cash and Carry (CNC)

Delivery-based trading, where system will require the client to bring in 100% margin either in the form of cash or non cash collaterals (approved securities – approved securities are same as those in the NRML Scrip basket) for buy orders and sufficient holdings for sell orders.

b. Margin Intra-day Square off (MIS)

Intra-day, margin-based trading in the Cash Segment and Futures Segment where the open positions will be squared-off by Risk Team at a predetermined time (Auto square off).

Auto square off process

Reliance Securities would have the discretion to square off the open margin intraday position of Client, (i) if the open margin intraday position is neither squared off nor converted into Delivery position by the client within the stipulated time, (ii) where the margin placed by the Client falls short of the margin requirement (iii) where the limits given to the client have been breached

Although the Auto square off trigger time is pre-defined, the actual square off could happen after trigger time and the same could happen at a price different from the price prevalent at the auto square off trigger time and the client has to bear the implication of order so executed.

In case the Auto Square off does not take place due to certain reasons like technical glitch, network or system problems, price band, etc. then Reliance Securities shall convert the margin intraday buy orders to delivery. Further if margin available in client account for the buy position so converted in delivery is short of requirement, then Reliance Securities will liquidate the shares to the extent of margin shortfall anytime thereafter and the Client will be liable for any resulting losses and all associated costs.

In case auto square off does not take place due to certain reasons like technical glitch, network or system problems, price band, etc., the short sell order placed under margin intraday remain open, then client will have to face loss on account of auction or close out if any as per the exchange prescribed procedure. Consequently, client will be responsible for any resulting losses, if any, and all associated costs including penalty levied by the Exchange for short delivery etc.

c. Normal (NRML)

Margin-based trading product where the open positions will not be squared-off subject to other surveillance and risk management & settlement rules.

The clients shall have to make the payment for obligation arising out of such trade within the settlement period stipulated for such trades, failing which recovery proceedings shall be initiated as mentioned in the policy.

 T7 Debit: For a client whose debit is outstanding as on T6th day or more, the shares from clients’

holdings are liquidated post 11:30 am on T7. An email and SMS in this regard will be sent to the

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client intimating the liquidation action that would be taken if the debit is not cleared till the stipulated time.

d. Covered Order (CO) –

A margin based product where the client is able to take a position at market price and also place a cover order for the position specifying the Stop Loss Trigger Price (SLTP).

E.g. A client places a buy covered order on a stock. The buy order is placed as a market order whereas simultaneously he is prompted to feed in the ‘Trigger price’ (within a pre-decided price range). Once the price touches the trigger price the order is converted into a market order for sell.

The order will not be executed without feeding in the trigger price.

The categorization of the stocks and the haircut applicable is reviewed from time to time. Any specific event which leads to increase in risks involved related to a particular scrip would also lead to change of category/haircut of such scrip. Also, in extremely volatile market with abnormal price/volume movements, or in case of warnings by regulators/exchanges, scrip may be re-categorized without prior notice and the customers shall regularize their accounts and trades accordingly.

Action in case of continuous debit:

 Holdings and open market positions will be liquidated to the extent of debit including margin shortage.

 Reliance Securities has the right to sell holdings and close out open market positions of any client without any notification if the client is not able to pay margin shortfall / clear debits.

Reporting to the Exchange(s)

In case the client is found indulging in suspicious activities, Reliance Securities may report such transactions to the exchange(s). The company is not responsible for any loss incurred by the client if he/she is found guilty of unethical practices.

The company will share all the required information to the regulator, exchange, or any other recognized regulatory body when a client specific details is asked for. The company reserves the right to inform the client based on the directions received by the aforementioned regulatory body.

System Downtime

Any benefit/loss incurred due to the downtimes caused by the following events will have to borne by the clients –

i. Exchange trading systems issues ii. Internet connectivity issues iii. Trading machine issues iv. Power failure

v. Strikes vi. Force majeure vii. Terrorist attacks viii. War

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The functions/actions of the Risk Management department are included in, but not limited to the contents of the Risk Management Policy.

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