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CSE internal memo shows improper risk management since Jan

An apparent lack of co-ordination between the Surveillance and Market Operations Departments of the Calcutta Stock Exchange may have led to the severe payment crisis at the bourse in March this year leading to countrywide repercussions.

An internal memo written by the head of Surveillance Department to the CSE authorities in January this year indicates that it has not provided important information for taking necessary steps.

A copy of the memo available with PTI, reflected that the MOP department, primarily responsible for monitoring pay-ins and pay-outs of brokers, was not passing on any information to the Surveillance Department for it to take corrective action.

The Margin Department, which was earlier under the Surveillance Department, was also directly reporting to the top CSE functionary with regard to margins instead of to the Surveillance Department, the memo said.

As a result of this, the Surveillance Department failed to switch off the Traders Workstation of the brokers who were defaulting on settlement payments and were allowed to trade.

Citing instances, the memo said in two specific cases TWS were not switched off in spite of payment defaults.

As per rules, the Surveillance Department was authorised to switch off terminals of defaulting brokers on the basis of information from the Margin and MOP Departments.

Despite the fact that this was brought to the notice of the authorities in January no corrective steps were taken precipitating the March payment crisis.

The memo said that relevant information about pay-in defaults and margin dues could be obtained only after screening the members' trade details from the surveillance database, a process that is time-consuming.

The surveillance department of CSE, due to the nature of its sensitivity, had been attracting attention from February 2000.

Last year, the then surveillance head was transferred to the back office operations of the bourse on allegations that the concerned CSE official was passing on sensitive information to selected brokers over cellphone.

However, the CSE authorities described this as a routine transfer.

Sources in the CSE said that the formula adopted by the bourse while computing the gross exposure margin was not on the basis of the overall position of the broker, but only on the amount of delivery-based transactions.

This, according to sources, had resulted in lower collection of margin money from the brokers.

The massive payment crisis led to an all-India crash in share prices forcing the CSE authorities to meet the shortfall to the tune of nearly Rs 1 billion from the Settlement Guarantee Fund. Ten broking entities, causing the crisis, were later declared defaulters and suspended from trading.

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