Circular no.

: MCX/S&I/796/2020 October 26, 2020

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Surveillance Obligations for Trading Members

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In terms of provisions of the Rules, Bye-Laws and Business Rules of the Exchange and in
partial modification to Exchange circular no. MCX/S&I/380/2016 dated November 03, 2016
and circular no. MCX/S&I/456/2018 dated October 31, 2018; the Trading Members of the
Exchange are notified as under:

With a view to facilitate effective surveillance at the Trading Member level, the Exchange
has been providing following transactional Alerts to Trading Members in accordance with
above referred Exchange circulars, so as to facilitate the Trading Members to detect any
abnormality (if any) w.r.t. Client trading activity at the initial stage itself.

A) Transactional Alerts

Sr. No. Transactional Alerts Periodicity of Alerts

1 Significant increase in Client Activity Monthly
2 Sudden trading activity in dormant account Monthly
3 Concentrated Open Interest position Daily
4 High Turnover concentration Weekly

In addition to the above transactional alerts, the Exchange will be providing the following
two additional alerts, w.e.f., November 02, 2020:

Sr. No. Transactional Alerts Periodicity of Alerts

1 Large Trade (Quantity) Daily
2 Order Spoofing Daily

The Exchange shall continue to provide these alerts to the Trading Members through “MCX
e-Xchange”, a web-based facility (Reports-->Surveillance-->Alert/Report). The Trading
Members are requested to analyse these alerts and revert in case of adverse observations, if
any, to the Exchange at [email protected].

----------------------------------------------- Corporate office ----------------------------------------------

Multi Commodity Exchange of India Limited
Exchange Square, CTS No. 255, Suren Road, Chakala, Andheri (East), Mumbai – 400 093
Tel.: 022 – 6649 4000 Fax: 022 – 6649 4151 CIN: L51909MH2002PLC135594
www.mcxindia.com email: [email protected]
Trading Members may please note that the above-mentioned transactional alerts are an
indicative list. Trading Members may formulate their own alerts, in addition to the above
mentioned type of alerts, as per their surveillance policy. Further, as informed in the above-
referred Exchange circular, the Trading Members are advised to carry out the following
activities:

A) Client(s) Information:
Trading Members are required to carry out Due Diligence of its client(s) on a continuous
basis. Further, Trading Members shall ensure that key KYC parameters are updated on a
periodic basis as prescribed by SEBI including the following:
i. Income/ Networth details
ii. Contact details
iii. Directors/ Partners/ Trustees/ Karta in case of non-individual clients

Further, the latest information of the client shall also be required to be uploaded in UCC
database of the Exchange. Based on this information, the Trading Member shall establish
groups/ association amongst clients to identify multiple accounts/ common account/
group of clients. In case of any groups identified/ detected based on the grouping criteria
as mentioned in the Exchange circular no MCX/S&I/300/2017 dated August 23, 2017
related to Guidelines on Clubbing of Open Positions, the information about such group
of connected entities shall also be required to be informed to the Exchange including
details like Name, PAN, Relationship, etc.

B) Maintain and Monitor:

Trading Members, are also advised to maintain profile of the clients participating in
commodity derivatives, which may include Commodity wise client category (for e.g.
VCP, Trader, Hedger, etc.) as well. Further, any sudden change in the trading pattern of
the client which is not in line with the profile of client may be monitored. Also, Trading
Members are required to keep a watch on the trading behaviour of their clients and
monitor the same in view of their financial soundness/income/net-worth and business
background.

C) Analysis:
In order to analyze the trading activity of the client(s)/ Group of client(s) or Commodity
identified based on above alerts, the Trading Members are required to:
a. Seek explanation from such identified client(s)/ Group of client(s) for entering
into such transactions.
b. Seek documentary evidence such as bank statement/ warehouse receipt (for
commodities with compulsory delivery) or any other documents to satisfy
itself.
1. In case of funds, Bank statements of the client(s)/ Group of client(s) from
which funds pay-in have been met, to be sought. In case of commodities
with compulsory delivery, documentary evidence including warehouse
 receipt of the client(s)/ Group of client(s) for which commodities pay-in
have been met, to be sought.
2. The period for such statements may be at least +/- 15 days from the date of
transactions to verify whether the funds for the settlement of such trades
actually belongs to the client for whom the trades were transacted.

c. After analyzing the documentary evidences, including the bank statement/

warehouse receipt, the Trading Member shall record its observations for such
identified transactions for client(s)/ Group of client(s). In case where adverse
observations are recorded, the Trading Member shall report all such instances
to the Exchange within 45 days of the alert generation. The Trading Member
may seek extension of the time period from the Exchange, wherever required.

D) Additional Analysis:
Additionally, Trading Members are also advised to take into consideration the following
aspects in their analysis
i. Conduct periodic analysis of trading behaviour of clients who appear
repeatedly in the transactional alerts and/or have been repeatedly found to be
breaching the norms prescribed by SEBI/Exchange;
ii. Monitor any sudden trading activity in dormant account and to inform such
abnormality to the Exchange;

E) Monitoring and reporting:

a. For effective monitoring, Trading Member shall:
1. Frame a surveillance policy covering:
a) Receipt of Alerts from Exchange/ generated at Trading members end.
b) Time frame for disposal of alerts and if there is any delay in disposal,
reason for the same shall be documented.
c) Suspicious/ Manipulative activity identification and reporting process
d) Record Maintenance
2. The surveillance policy of the Trading Member shall be approved by its Board (in
case of corporate trading member), Partners (in case of partnership firms) or
Proprietor (in case of sole proprietorship firm) as the case may be.
3. A quarterly MIS shall be put up to the Board (in case of corporate trading
member), Partners (in case of partnership firms) or Proprietor (in case of
sole proprietorship firm) on the number of alerts pending at the beginning
of the quarter, generated during the quarter, disposed off during the
quarter and pending at the end of the quarter. Reasons for pendency shall
be discussed and appropriate action taken. Also, the Board (in case of
corporate trading member), Partners (in case of partnership firms) or
Proprietor (in case of sole proprietorship firm) shall be apprised of any
exception noticed during the disposal of alerts.
 4. The surveillance process shall be conducted under overall supervision of
its Compliance Officer.
5. Designated Directors/ Partners/ Proprietor/ Compliance Officer would be
responsible for all surveillance activities carried out by the Trading
Member and for the record maintenance and reporting of such activities.

b. Internal auditor of Trading Member shall review the surveillance policy, its
implementation, effectiveness and review the alerts generated during the period
of audit. Internal auditor shall record the observations with respect to the same in
their report. This will be effective as and when the internal audit guidelines
become applicable for trading members.

F) Details to be provided on Quarterly Basis:

Trading Members, are also required to provide the status of the alerts forwarded to them
on a quarterly basis, in the following format to the Exchange.

Name of No. of alerts under No. of new No. of alerts No. of alerts
Alert process at the alerts closed in the pending/under
beginning of received in quarter process at the end
quarter the quarter of quarter

The above details shall be forwarded to [email protected] for the previous

quarter, within 15 days from the last trading day of the respective quarter. The same
should be provided starting from quarter ending December 2020.

The above guidelines are illustrative and not exhaustive. Based on facts and circumstances,
the Trading Members are required to exercise their independent judgment and take adequate
precautions while handling the processing of transactional alerts.

Trading Members are required to take a note of the above and put in place the required
modifications in their procedures, policies and processes etc.as may be required.

Armaan Gaus
Asst. Vice President
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Kindly contact Customer Support on 022 - 6649 4040 or send an email at
[email protected] for further clarification.