Not really any principal risk with shortening the

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Not really any principal risk with shortening the settlement period, but you could improve the principal risk by: making simultaneous transfer possible/a requirement, introduce direct access to electronic payment, or have a 3rd party guarantee option from clearinghouse B. Read “Bogged-down in Bombay” (Item 17.1) and answer the following: 1. What are the infrastructure problems of the Bombay Stock Exchange? The market is physical but there is no central depository - shares are kept in vaults of custodians and transferred with each trade. These vaults are at or over their maximum capacity, meaning 80% of trades failed to settle on time. Share registration delays could be longer than 6 months. There is no corporatization of brokers and no established code of practice for jobbers (those who buy and sell their own inventory - locals or information traders), and insider trading is common. There is a lack of liquidity in the secondary markets, and not enough custodians for the share volumes.
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“Liquidity is so poor that a trade of 100,000 shares can move the market by as much as 0.05%.” “India's stock-exchange failings extend beyond market mechanics. Corporate disclosure is patchy, with information channelled to a few favoured brokerages rather than the whole market. The law on takeovers is rudimentary. And although the market has at times been awash with new issues, Indian financial institutions are still barred from investing more than 5% of annualized incremental income in securities.” 2. What is badla ? Why is it like a futures transaction? Badla is a carry-forward system invented to deal with the lack of liquidity in the secondary market. It involved buying stocks with borrowed money with the stock exchange acting as an intermediary at an interest rate determined by the demand for the underlying stock. Like a futures contract, Balda is a form of leverage, but the broker (not the buyer or seller) is responsible for maintaining the margin. It’s a carry over of a transaction NOT a forward transaction “Suppose A wants to buy shares of a company but does not have enough money now. If A values the shares more than their current price, A can do a badla transaction. Suppose there is a badla financier B who has enough money to purchase the shares, so on A's request, B purchases the shares and gives the money to his broker. The broker gives the money to exchange and the shares are transferred to B. But the exchange keeps the shares with itself on behalf of B. Now, say one month later, when A has enough money, he gives this money to B and takes the shares. The money that A gives to B is slightly higher than the total value of the shares. This difference between the two values is the interest as badla finance is treated as a loan from B to A. The rate of interest is decided by the exchange and it changes from time to time.” 3. How did badla facilitate trading in stocks?
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