RISK MANAGEMENT POLICY

OF

IIFL WEALTH MANAGEMENT LTD

(BROKING)

October 2017

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Table of Contents

1. Introduction .................................................................................................................................... 3
2. Key Risks in the Broking Business ................................................................................................... 3
3. Major Parameters of the Risk Management policy ........................................................................ 7
A) Limits for Trading ........................................................................................................................... 8
B) Authorised Personnel ..................................................................................................................... 9
C) Risk Management Procedures ........................................................................................................ 9
i) Cash Equity / Stock Purchases and Sales ................................................................................ 9
ii) Derivative Positions .............................................................................................................. 10
iii) NEAT/BOLT Limits .................................................................................................................... 11
D) Margin Management on the Exchange ........................................................................................ 11
E) Stocks Classification for trading ................................................................................................... 12
F) Compliance Procedures ................................................................................................................ 12
G) IPO / New Listing trading policy: ................................................................................................. 13
H) Error Trades: ................................................................................................................................. 14
Annex I Categories of Scrips and Haircuts to be Applied ...................................................................... 14
Annex II Format of Trade Register to be Maintained Manually (Deal Blotter)..................................... 15

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 1. Introduction
This document details the guidelines and procedures to be followed by the Risk
management department of IIFLW with main objectives as mentioned below.

 To enumerate the key risks in the broking business and lay down steps on how they
are managed and mitigated
 To define a clear and simple procedure for risk management relating to equity and
derivative trades.
 To ensure consistency, uniformity, zero errors and transparency in various risk related
activities.
 To assist in faster turnaround time thereby ensuring higher customer satisfaction and
higher revenues

2. Key Risks in the Broking Business

Risk Category Key Risks Mitigating Controls Residual Risk

Credit Risk - Exposure to clients  The stock is Immediate liquidity
purchases on account of received on T+2 requirement for
purchase positions and it can be sold pay-in
taken on their to recover the
behalf, and failure of amount Losses on account of
client to settle pay-  As a routine price movement
in amount measure all new beyond the margin
clients have to maintained
keep 10% margin
in the form of “Net Approved
worth”(defined exceptions
below) for price
changes
 Institutional client
trades are
confirmed by
Custodians latest
by T+1
Credit Risk - Exposure to clients Please refer to Operational risk in
derivative positions on account of open Section on terms of failure to
derivative positions Derivative positions call up margins from
(Long or short below (3) (C) (ii). the client in time
Futures, written
options) taken on
their behalf, i.e. risk
of clients failing to
pay margins when
called upon to do so

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Credit Risk - Sale – Where the client Such transactions Auction charges
Settlement risk requests a special would need to be would be levied.
dispensation for sale approved by Immediate debit
of stock without authorised would hit IIFLW’s
having it in his POA personnel and have margins maintained
Demat A/c with mitigating controls, with the exchange.
IIFLW, if the client as given in Section
fails to honour the (3) (C) (i) The stock would be
pay-on obligation, sold to recover
there will be an proceeds. If this
auction (Buy-in) exceeds client net
worth, then it would
hit IIFLW’s books
Price / Market Risk - IIFLW’s margins on Margins are Operational risk in
--Margin the exchange regularly monitored terms of failure to
Management getting exhausted and the moment we call up margins from
leading to lockdown reach 85% of our the client in time
of our terminals total margins, MTM
margin calls are If clients do not pay
made to clients for then their positions
immediate payment. would need to be
Please refer to the closed out
section 3(D)
Price / Market Risk - For computation of These are monitored Intra-day price
change in value of net worth, holdings daily at end of day movements might
collateral of clients are valued and net worth is lead to a gap in
at current market uploaded into the margins
price. Their value Omnesys system,
might fall leading to and fresh margin Also, clients may pay
steep fall in margins calls are made margins in approved
kept with us whenever required stock while for us
cash margins are
debited, leading to a
net funding cost

Compliance Risk  Market  Surveillance files

manipulation and are received
creation of from the
volumes using exchange, which
circular trades, are reviewed to
synchronised assess whether
trades between there are any
market suspicious trades
participants

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  Possibility of  Rules around
money laundering employee
by layered trades trading
 Insider trading  Mobile phones
 Front-running are not allowed
inside the
Dealing room
 A standard
surveillance
questionnaire
has been
prepared to send
to clients when
we receive
enquiries from
the exchange
Operational Risk -  Omnesys goes  If Omnesys goes  While the last
System Risks down, so down, client day’s positions
information on orders would are captured on
client collateral / directly be input tape, these
net worth into the might take time
becomes exchange system to recover
inaccessible (eg NEAT / BOLT)
 CLASS goes down and a record of  Orders would
making it difficult orders would need to be
to account for need to be kept executed
settlement in an Excel sheet without
obligations and (detailed format knowing current
positions given below in limits
 Recorded lines Annex II)
/email servers  Last day’s
down, so audit collateral
trail of trades not positions would
maintained be used.

 If CLASS goes
down, we would
work with the
Trade Excel
sheets received
from the front
office

 In the absence of
email, recorded
lines would be
used. In the

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 absence of
recorded lines,
mobiles would
be used, and a
confirmation
email should be
sent in every
case.

 We are working
on a BCP / DR
plan that would
enable a quick
switch to the
back-up server

Operational risk – Trades devolving to  All orders executed A dispute may take
erroneous execution IIFL Wealth because are either time to resolve;
of discrepancy confirmed using immediate liquidity
between client emails or recorded for pay-in
intent / instruction lines, so that trail is obligations is
and execution maintained required
 Institutional trades
Clients are not are confirmed on T
allowed to directly (for derivative
put in orders at trades) and latest
present. But if by T+1 (for Cash
internet trading is Equity trades)
allowed, then there
is the added risk of Additional price /
fat finger risks by quantity validations
the client will be built in to
check potentially
erroneous trades
(which are at
variance from the
current market
orders)

This is anyway
subject to the
current exchange
limit of 10 Lac
shares or Rs. 10
crore per order

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 Operational risk – Credits / debits to Bank and demat Failure of checker to
client A/cs and the wrong A/c A/cs related to a catch an error or
Demat A/cs client are collusion between
maintained by the employees
Operations team
with a four-eye
(maker-checker)
system, based on
documentation
provided by the
client as part of the
A/c opening
formalities (or
subsequently).
Cancelled cheque
copy is required for
bank A/c

Operational Risk - Unauthorised All client

unauthorised trading by the front instructions need to
trading office using client be backed either by
positions email or recorded
line instructions &
are subject to audit
Segregation
between dealers
(front-office staff)
and back-office
staff.
All trades are settled
by separate
personnel in the
back-office by a
maker-checker
process based on
counter-party /
exchange
confirmations

3. Major Parameters of the Risk Management policy

With respect to broking operations, IIFLW follows a margin based automated Risk
Management System (RMS) . Cash margins of the clients are uploaded in the Omnesys system
for trading purpose every day morning on the basis of their Net worth (Adjusted ledger
balance + Span margin paid by the client + IIFL Wealth approved stock in the client’s POA
demat A/c with IIFL Wealth ) criteria as prescribed below.

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Adjusted Ledger balance is arrived at as follows:

ALB =

Ledger balance

Less 1.5 times value of undelivered stock

Less Buying value of short option, which is implied Purchase value of Short Options Position

Add Fixed deposit / Bank Guarantee pledged with exchange

Add Margin charged on Options Premium (NSE Currency) on T day

For the purpose of ascertaining the value of approved stock, haircuts will be applied,
depending on the scrip category. The current scrip categories are provided in Annexure I. This
will be changed from time to time, depending on communication received from the
Exchanges, and hence, will not require Board approval.

Clients will be given a trading limit based on their net worth, as specified below:

A) Limits for Trading

Daily margin/limits are given in Omnesys trading system as per below-mentioned criteria in
the table. Any deviation from these limits/margins will be uploaded in Omnesys on the basis
of specific approval from the authorised personnel (as specified below).

OMNEYSIS LIMITS

Account Type
Cash F&O
NFDC (Non Upto Networth Up to Networth with cap on Max Span margin of
Funding accounts) with cap on max Rs. 2 crore per client
limit of Rs. 10
crore per client
NRI Clients (NRIC) Standard limits No F&O trades allowed
are given basis
balance available
under PIS
account
Margin Funding As per approved As per approved sanction and margin terms with
clients sanction and cap on max Span limit of Rs. 2 crore per client
margin terms
with cap on max
buy/sell limit of

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 Rs. 10 crore per
client
PMS Default Buy sell Default Buy sell limit of Rs. 50 lakh
limit of Rs. 50
lakh
DII & FII Default Buy sell Default Buy sell limit of Rs. 10 cr
limit of Rs. 10 cr

Further client wise position limits are uploaded in Omnesys system for all F&O traded stocks
to avoid breach/penalty to clients by exchange. Also all the above limits are subject to the
exchange-level single order restriction set for 10 lakh qty or Rs. 10 crore value across
clients, whichever is lower.

B) Authorised Personnel

Any waiver / exception approval under this policy needs to be copied to the respective
Relationship Manager, if it is not initiated by him /her, and approved by the following
authorised personnel.

Nature of Exception Authorised personnel Remarks

Limit of up to Rs. 50 Cr, Head of the Broking Limit represents the total
where margin is maintained Business exposure that would be
OR Head of Credit OR taken, and not just the
Chief Risk Officer margin amount
This would include
situations where a sale is
being requested for without
stock being present in the
client’s POA demat A/c with
IIFLW
Limit of above Rs. 50 Cr Additional approval of CEO This would include the
where margin is maintained (apart from the above) above situation
Limit of any amount, where Additional approval of CEO This would include the
no margin is to be (apart from the above) above situation
maintained

C) Risk Management Procedures

i) Cash Equity / Stock Purchases and Sales

For Purchase Transactions:

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 For all clients (including new clients, with no net worth) upfront margin of 10% of trade value
is required either in the form of cash/collateral for trade execution on T day and balance can
be provided on exchange settlement date (before 10 AM). Any exception to waive or delay of
upfront margin would need to be approved by the authorised personnel as provided in
section 3(B).

For Sale Transactions:

Usually, the stock should be there in the client’s IIFLW POA demat A/c. If it is not there, then
no approval is required, if the client has enough net worth to cover the sale. If there is a
shortfall, then an approval from the authorised personnel would be required. In such cases,
we should endeavour to have a signed Delivery instruction for transfer of the stock to the
IIFLW PoA A/c, or to an IIFLW exchange settlement A/c. A scanned copy can be followed by
an original, with approval from the authorised personnel mentioned above.

Details of the client’s existing net worth position need to be provided when seeking approval.
Approvers should take into account that a default and auction would lead to auction charges
of around 20% of trade value being levied on top of the overall position.

ii) Derivative Positions

For purchase of futures, full upfront SPAN margin in collateral that is acceptable by the
exchange needs to be there. No exceptions can be allowed, since this is required by
regulation.

We should continue to follow the existing process of seeking approval from authorised
personnel where there is a Single stock F&O deal of more than Rs. 10 Crore. This is taken to
assess the capability of the client to fund MTM margins in the event of a large MTM
movement.

Mark-to-market (MTM) margins would be taken based on market movements. If a client

cannot provide MTM margins by end of day, or if IIFLW’s margins with the exchange have
crossed 85% utilisation, then approval from the authorised personnel will be taken. Details of
net worth should be provided when seeking approval. If approval is not given, then client
positions need to be liquidated (squared off) immediately and latest by the next day (T+1).
Front office may take a call on which positions to square off first, to release margins.

In all cases if 85% of client’s’ net worth is exhausted and MTM margin is not made good
by the client then the Client / RM need to be informed and a reminder needs to be sent to
the client that his positions would get closed out. At least two hours notice must be given. If
the client does not make good the MTM margin within the given time, the position should
be squared off.

Any exception would require re-approval from the above authorised personnel.

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For purchase of options, only option premium is required to be paid by the client in cash.

Writing Options

The client needs to provide upfront SPAN margins in terms of the exchange prescribed
collateral. No waiver is possible, as per regulatory requirements.

MTM margins would also be taken based on market movements. If a client cannot provide
MTM margins by end of day or if IIFLW’s margin with the exchange crosses 85% utilisation
then approval from the authorised personnel will be taken. Details of client’s net worth
should be provided when seeking approval. If approval is not given, then client positions need
to be liquidated immediately, and latest by the next day

In all cases if 85% of net worth is exhausted and MTM margin is not made good, then the
Client / RM need to be informed and a reminder needs to be sent to the client that his
positions would get closed out. At least two hours notice must be given. If the client does not
make good the MTM margin within the given time, the position should be squared off.

Any exception would require approval from the above authorised personnel.

Options would be written for only up to 3 months. Longer dated options will only be taken
after approval of the above authorised personnel, since they encounter extreme volatility
in prices and margin requirements.

iii) NEAT/BOLT Limits

Besides Omnesys we have NEAT/BOLT limits also granted to ultra HNI Clients and limits for
the same are given as per approval from Mr. Karan Bhagat (CEO).

D) Margin Management on the Exchange

IIFL Wealth’s margins on the exchange need to be continuously monitored during market
hours to ensure that we do not exhaust the margins, causing our terminals to be locked down.
This can lead to an embarrassing situation with both our clients and the Exchange.

Typically, though not necessarily, this will be on account of derivative trades undertaken on
behalf of clients. Whatever may be the cause (Cash Equity Trades / derivative trades) the
margin requirement needs to be allocated to client positions (it could be initial SPAN margin
or MTM margins), client margins need to be debited and the Exchange margins needs to be
replenished. Procedures for making client level margin calls are given in Section C of this
policy. Usually, client positions where the client has failed to pay margin would be squared
off to reduce margin requirements. However, to deal with exigencies, a line of Rs. 200 Crores
has been taken from ICICI Bank. It should be the endeavour of the front office team that
IIFLW’s margin utilisation should not cross 85% at any given time.

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In accordance with regulatory norms, client securities can be placed with the exchange as
security only when there is a net debit balance for that client in the client ledger and it can
only be used to pay for the margin of that client. The securities to be pledged shall be pledged
from Beneficial Owner (BO) account tagged as "IIFL Wealth - Client Account" and appropriate
statements need to be sent to the client whenever this is done.

E) Stocks Classification for trading

Out of wide range of stocks available for trading on NSE and BSE platform, Risk
Management team has identified/classified stocks which are to be restricted for
purchasing on Omnesys screen for IIFLW clients on the basis of the criteria given
below. Any deviation/Exceptions are to be allowed only on the basis of approval
from the authorised personnel.

Below criteria are used to disallow/block stock for trading on Omnesys Screen

1) VAR margin of the stock is above 50%.

2) Free float market cap of the stock is less than Rs. 250 crore
3) Daily average traded value for past six month is below Rs. 50 Lacs per exchange.
4) All Penny / Z stocks / illquid stocks as specified by exchange from time to time are
restricted for trading purpose.

Sales will also be subject to approval for these stocks since these stocks may be
vulnerable to market manipulation or tax structuring transactions.

Further to the above conditions:

 All IIFL Coverage, PSU & MNC Companies are default allowed irrespective of Market cap and
volumes
 No Restriction for single order up to INR 5 lacs in value
 No Restriction for scrips resulting because of corporate action
 If a block scrip was purchased through us, no approval will required to sell through us
 All Group 3 Stock & Graded Surveillance Measure (GSM) stocks are Default block
irrespective of Market Capitalisation and volumes

F) Compliance Procedures

 KYC: KYC procedures prescribed by SEBI will be completed for all clients who are on
boarded. Any suspicious activity like repeated circular trading in stocks will be
reported to the FIU_IND

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  Surveillance of Markets/Stocks: Risk Management also does daily
Surveillance/Monitoring, as given below and informs the RM/ SRM / Dealer.
1) Daily monitoring and Intimation of client taking position in F&O ban stocks
2) Daily monitoring and Intimation of position taken for more than 0.5% of issued
capital of stock
3) Daily monitoring and Intimation of NRI/FPI restricted stocks
4) Single scrip volume concentration Intimation to be incorporated in system (already
under process).

Daily Cross trades monitoring to be incorporated in system. Surveillance files received from
the Stock Exchanges are checked for any red flags in this regard.

 Insider Trading / Front running: Employees should only trade through IIFL or IIFLW,
as given in the employee trading policy.
 In order to avoid front running, mobile phones shall not be permitted inside the
dealing room. The same should be deposited outside the dealing room on a daily
basis during trading hours. Further, in case for any reason landline phones are not
working then Dealers shall take permission (through email) from Chief Risk Officer
(CRO) to use mobile phones inside the dealing room. Post analysing circumstances
CRO may permit the use of mobile phones only till the time landline phones are not
working. In this situation, all client orders should also be confirmed on email.
 FPI / NRI clients – foreign portfolio investors / NRIs have limits on positions that they
can take in companies. These need to be tracked.

G) IPO / New Listing trading policy:

Trading in any new listing scrips will be permitted basis below criteria:

1) Issue Size of IPO < than 250 crore

Any New listing scrip/IPO scrips having issue size of less than 250 crore will be kept
under illiquid / ban list from day 1. Even exchange also keeps such stock in T2 T
segment for Initial 10 days and only delivery based volume is permitted by
exchange. Also exchange takes 100% upfront margin for such scrips. Post
completion of 1 month such scrip will be either permitted /kept under illiquid
block list basis selection criteria prescribed above (in section E). However such
scrips will be opened only for selling purpose if client carries that stock in demat
account with IIFL Wealth and buying will be permitted only on receipt of approval
from the authorised personnel.

2) Issue Size of IPO > than 250 crore

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 Any new listing scrip/IPO scrips having issue size of greater than 250 crore will not
be kept under illiquid / ban list from day 1. Exchange also takes only applicable
VAR margin hence these will not be kept under block list. Post completion of 1
month such scrip will be either permitted or kept under illiquid block list basis
selection criteria prescribed above.

H) Error Trades:
A record of error trades will be kept separately and authorisation will be taken from
the authorised personnel to unwind positions as soon as possible. Error trades will
invariably devolve on IIFL Wealth and arrangements have to be made for pay-in
obligations. Reasons for error can be recorded on the email. Further operational
processes are provided in Standard Operating Procedures (SOPs).

If a client or a custodian (acting for a client) disputes a trade, then one would need
to go back to the original client order ( that would be recorded either on a recorded
line or on email) and check. Accordingly, it will either lead to an error trade or will be
taken up by the client.

Annex I Categories of Scrips and Haircuts to be Applied

6 month avg
[Link] daily traded Hair No. of
Category VaR Margin
([Link]) volume (Rs. cut Scrips
Crs)

A <15% >25000 >50 25% 73

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B <17.5% >7500 >25 35% 73

C <25% >3500 >5 50% 174

D <25% >750 >3 60% 228

E <25% >500 >1 75% 219

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F Balance Balance Balance 485
%

Annex II Format of Trade Register to be Maintained Manually

(Deal Blotter)
If Omnesys goes down, the following format would be sent to the back-office. It should be noted
that a single client order might result in multiple orders / trades.

Dealer Client Client Instruction Scrip Buy Qty Rate Remarks

Name CRN Name mode / filled (if any)
(phone / Sell
email)

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