No.7\9\2011-MKT-I Dated the 31st January, 2013

To(i) Managing Director and CEO, Multi Commodity Exchange oflndia Ltd.,

Exchange Square, CTS No. 255, Suren Road, Andheri (E),Mumbai - 400 093.

(ii) Managing Director and CEO, National Commodity and Derivatives ExchangeLtd., Akruti Corporate Park, LBS Road, Kanjur Marg (W),Mumbai - 400 078.

(iii) Managing Director and CEO, National Multi Commodity Exchange of IndiaLtd., 5, 4th Floor, H. K. House, B/h, Jivabhai Chambers, Ashram Road,Ahmedabad - 380 009.

(iv) The Chief Executive Officer, Indian Commodity Exchange Limited, RomellTechnology Park, 8th Floor, Nirlon Compound, Western Express Highway,Goregoan East, Mumbai - 400 063

(v) The Chief Executive Officer, ACE Derivatives and Commodity ExchangeLimited, 401 B, 4th Floor, Building No.4, Infiniti IT Park, Gen. AK VaidyaMarg, Dindoshi, Malad (E), Mumbai - 400 097.

(vi) The Chairman, Universal Commodity Exchange Ltd., Exchange House,Millennium Business Park, Mahape, Navi Mumbai - 400710.

Subject: Broad Guidelines on Algorithmic Trading.

Sir,

The adoption of technology for the purpose of trading in commodity futures marketshas been on the rise over the past few years. Members of the commodity exchanges as well astheir clients are now making increased usage of trading algorithm which is contributingsignificant volumes on the commodity futures trading platform. However, there are nouniform guidelines for the algo trading at present.

2) The Commission has decided, in consultation with the National CommodityExchanges, to put in place the following broad guidelines for regulation of algorithmictrading in the commodity futures market.

3) Definition: Any order that is generated using automated execution logic shall beknown as algorithmic trading (hereinafter referred to as "algo"),

4) The commodity exchanges shall have arrangements, procedures and system capabilityto manage the load on their systems in such a manner so as to achieve consistent responsetime to all members. The exchange shall continuously study the performance of its systemsand, if necessary, undertake system upgradation, including periodic upgradation of itssurveillance system, in order to keep pace with the speed of trade and volume of data thatmay arise through algorithmic trading.

4.1 While approving the algo trading, the Exchanges shall ensure that:

a) There is clear classification ofalgo orders in terms ofCTCL terminal code/ATSUser-ID approved by the Exchange for algo trading.

b) The orders of clients are routed through member server only and client ordersare not placed directly to the Exchange System.

c) The exchanges shall not approve algorithms that may not be conducive toefficient price discovery or fair play.

d) The exchange shall subject the systems of the member to initial conformancetests and ensure that the checks mentioned in these guidelines are in place.

e) Immediate Or Cancel (IOC) orders shall not be allowed to be placed using algotrading.

f) The· algas which will 'take liquidity' away from the market shall not beapproved. While approving algo strategies, Exchanges shall record the reason asto why these are allowed and how it will induct more liquidity in thecontract/system. Exchanges will also make half-yearly review of effect of theapproved strategies on liquidity and would discontinue Idisapprove any strategy .which fails to induct liquidity.

4.2 Algo trading shall not be allowed in mini and micro contracts as already prescribed bythe Commission's Circular No 1I1120111MD-II/Circular mini-Micro -HFT-Algodated 27.11.2012.

4.3 Co-location, eo-hosting or any other facility or arrangement which puts somemembers in disadvantageous position vis-a-vis other members shall not be allowed.Algo trading shall not be permitted from Exchange hosted CTCL terminals.

4.4 In order to ensure orderly trading in the market and fair usage of the trading platformby all members, the exchange shall put in place the following economic disincentivesfor daily algo order-to-trade ratio:

Daily Order-Trade Ratio (Member wise) Charges (per Order)Upto 50 NIL50 to less than 250 (on incremental basis) 1 paise250 to less than 500 (on incremental basis) 5 paise500 or more than 500(on incremental basis)* 5 paise

*In case the ratio is 500 or more than 500 during a trading day, the concerned membershall not be permitted to place any order for the first 15 minutes on the next trading day (inthe continuoustrading session) as a cooling off action. However, the trading member shall bepermitted to enter transactions in risk reducing mode during such a cooling off period.

a) For the purpose of calculation of daily Order-to-Trade ratio, all algorithmicorders, i.e., order entry, order modifications and order cancellations shall beconsidered. .

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b) Further, the exchange shall put in place monitoring systems to identify and initiatemeasures to impede any possible instances of order flooding by algos.

4.5 The exchanges shall place a limit on numbers of orders per second from a particularCTCL ID fATS User-ID not exceeding 20 orders per second. For number of ordersexceeding 20 per second the Exchange shall prescribe economic disincentives andinform the same to the Commission.

4.6 The exchange shall ensure that all algorithmic orders are necessarily routed throughmembers servers located in India and through specified CTCL IDfATS User-IDapproved by the exchange for algo trading. The exchanges shall also ensure that thesehave no interlink with any system or ID located/linked outside India:

4.7 The exchange shall have appropriate multi-layer risk control mechanism to addressthe risk emanating from algorithmic orders and trades. The minimum order-level riskcontrols shall include the following:

a. Market orders shall not be allowed to be placed using algo trading, only limitorders will be allowed.

b. Daily Price Limit check - The price quoted by the order shall not violate thedaily price limit defined in the contract specifications.

c. Maximum order size check - The quantity quoted in the order shall not violatethe maximum order size limit defined in the contract specifications.

d. Net open position check: The quantity quoted in the order shall not violate thelimit on net open position at member level and client level defined in thecontract specification/laid down by the Commission.

e. Market Price Protection: Within the daily price limit, the exchanges mayprescribe any other price limit which may be a pre-set percentage of LTP.

4.8 In the interest of orderly trading and market integrity, the exchange shall put in placea system to identify dysfunctional algos (i.e. algos leading to loop or runawaysituation) and take suitable measures, including advising the member, to shut downsuch algos and remove any outstanding orders in the system that have emanated fromsuch dysfunctional algos. Further, in exigencies, the exchange should be in a positionto shut down the member's terminal.

4.9 The exchange may seek details of algo strategies to be used by the members forpurposes of inquiry, surveillance, investigation etc.

4.10 The exchange shall submit a monthly report on algorithmic trading to theCommission inter-alia incorporating turnover details of algorithmic trading,algorithmic trading as percentage of total trading, number of members f clients usingalgorithmic trading, action taken in respect of dysfunctional algos, status ofgrievances if any, received and processed, etc.

4.11 Any event leading to slow down or trading halt or any other abnormal developmentshall be immediately reported to the Commission with full details.

4.12 The exchange shall ensure that the member shall provide the facility of algorithmictrading only upon the prior written permission of the exchange. The members already

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using algorithmic trading shall require the approval of the exchange by 31st March2013. While considering such approval, the exchanges shall ensure that the controlsspecified in these guidelines are fully implemented by the member and will submit areport to the Commission in this regard.

4.13 The other risk management checks already put in place by the exchange shall continueand the exchange may re-evaluate such checks if deemed necessary in view of algotrading.

4.14 Exchange shall have an effective surveillance mechanism to ensure that onlyapproved algo strategies are used.

5) The Exchanges shall further ensure that their members providing the facility ofalgorithmic trading comply with the provisions of these guidelines. The exchangeshall specifically ensure that:

5.1 The members maintain sufficient deposits / funds for margin/ settlement obligations,in respect ofthe trades effected through algo facility, whether on own account orclient's account and that algorithmic trading does not result in shortages in margindeposit or settlement obligation.

5.2 The members' trades routed through algos are not ill the nature of abnormal /manipulative trades.

5.3 The annual compliance report as submitted by member to the exchange includes aspecific system audit report of the algo trading ensuring that the checks are in place.Such system audit shall be conducted by Certified Information System Auditors(CISA) empanelled by exchanges. Further, the exchange shall subject the membersystems to more frequent system audits, as required.

5.4 The members have the capability to set up and apply the necessary risk control checksat the individual order level and client level before each order generated by the algo isreleased to the trading system and implements the following minimum level ofchecks:

a. Daily Price Limit: Orders are not released in violation of the daily price limitdefined in the contract specification or any other limit which may be prescribedby the Exchange.

b. Maximum Order Size: Orders are not released in violation of the maximum ordersize limit defined in the contract specification.

c. Position Limit: The net position of the client / member are not in violation of theposition limits prescribed in the respective commodity contract specification/laiddown by the Commission.

d. An algo shall account for all executed, unexecuted and unconfirmed orders,placed by it before releasing further order(s). Further, the algo system shall havepre-defined parameters for an automatic stoppage in the event of algo executionleading to a loop or a runaway situation. The member shall have system toidentify dysfunctional algos.

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e. All algorithmic orders are tagged with a unique identifier provided by theexchange in order to establish audit trail.

5.5 The exchange shall ensure that the member, desirous of placing orders using algos,submits to the exchange an undertaking that -

a. The member has proper procedures, systems and technical capability to carry outtrading through the use of algorithms.

b. The member has proper procedures and arrangements to safeguard algorithmsfrom misuse or unauthorized access.

c. The member has real-time monitoring systems to identify algorithms that may notbehave as expected. Member shall keep exchange informed of such incidentsimmediately.

d. The member shall maintain logs of all trading activities to facilitate audit trail.

e. The member shall maintain record of control parameters, orders, trades and datapoints emanating from trades executed through algorithm trading.

f. The member shall obtain prior approval of the exchange on any modification orchange to the approved algos or systems used for algos. The Exchange shall .ensure conformance of such modified algo or systems also to the requirementsspecified in these guidelines.

6) Exchanges are further directed to:

1. take necessary steps and put in place necessary systems for implementation ofthese guidelines by 31st March, 2013;

11. make necessary amendments to the relevant bye-laws, rules and regulations forthe implementation of these guidelines;

111. bring these guidelines to the notice of the members of exchange and alsodisseminate the same on their website;

IV. communicate to the Commission, the status of implementation of the provisions ofthese guidelines in their Monthly Report.

7) These guidelines are being issued in exercise of the powers conferred by Rule 7 of theForward Contracts (Regulation) Rules, 1954 to protect the interests of investors incommodity market and to promote the orderly development and regulation of the commodityfutures market.

8) These guidelines shall be effective from 1.4.2013 and compliance of the same may bereported to the Commission.

Yours sincerely ~

~~\(Pr~: ~"ti~~r;)l

Director

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