NSE asks Edelweiss to return client securities; Brokerage to move court

Securities were wrongfully placed as collateral by now-banned sub-broker Vrise with Edelweiss

Leading financial services firm Edelweiss will move the Securities Appellate Tribunal (SAT) against an order of the subsidiary of the National Stock Exchange (NSE) on a matter concerning securities pledged by a sub-broker.

On Thursday, NSE Clearing (NSCCL), a clearing corporation wholly owned by the NSE, ordered Edelweiss Custodial Services (ECSL) to return securities belonging to the clients of VRise, which is a sub-broker of the bourse. 

The securities were pledged as collateral with ECSL, which moved to liquidate them after VRise failed to meet its payment obligations. 
 

Subsequently some clients of VRise complained to the brokerage, NSE, as well as the Securities and Exchange Board of India (Sebi) that the securities belonged to them and were wrongfully given as collateral. 

The NSCCL diktat has landed Edelweiss in a spot. “We are aggrieved by the directive to reinstate the liquidated securities, which in our view, is unprecedented and is a change in the premise on which the market structure operates. We believe, this could disrupt the well-established hierarchy of trading member-clearing member-clearing corporation and significantly increase clearing and settlement risks, while disrupting the ecosystem. We will therefore challenge the same before the Securities Appellate Tribunal,” Edelweiss said in a statement.

The NSE on Thursday issued a circular declaring VRise a defaulter and also ‘expelled’ its membership. Separately, the bourse ordered ECSL to move the securities it had pledged to a separate demat account. 

In January, the capital markets regulator had ordered restraining VRise from registering new clients. This is the latest in series of instances involving brokers misusing securities belonging to their clients. 

The issue has threated to disrupt the market structure and trust. In market parlance, ECSL is a registered “professional clearing member” of NSCCL and VRise is a “trading member” with ECSL.

As a professional clearing member, ECSL is responsible for clearing and settling the buying and selling of its trading members.

In order to take exposure on a stock exchange, a trading member has to provide collateral to professional clearing member, which, in turn, provides collateral to the clearing corporation. In an event of default by a trading member, the professional clearing member has the powers to liquidate the provided collateral.  

Similarly, the clearing corporation has the powers to liquidate collateral belonging to the professional clearing member if it fails to meet financial obligations.

The markets regulator has taken several measures to tackle this issue, the latest being an online system to monitor movements of client securities as well as detect misuse.