Sebi pushes timeline to segregate and monitor collateral at client level

Sebi further defers new margin rule to May 2

The Securities and Exchange Board of India (Sebi) has extended the timeline for implementing the framework on client segregation and monitoring by about two months.

The new system, under which a broker will have to segregate collateral at client level, will come into effect from May 2. 

"Sebi has received requests from various stakeholders to further extend the aforesaid timeline. It has been decided that provisions of the said circular shall come into force with effect from May 02, 2022," a note from the regulator said on Thursday. 

The regulator had come out with a framework for segregation and monitoring of collateral at client level amid instances of misuse of client collateral by trading members and in the aftermath of the Karvy Stock broking scam where clients' shares had been pledged illegally as collateral against loan.

Segregation of client collateral will help protect client collateral from misuse by trading or clearing members. 

Currently, brokers give limits on a combined basis across segments. However, the circular talks about allocation of collateral versus each segment – and therefore, this system will necessitate changes to how traders and brokers operate and clients would have to indicate in advance where (cash, derivatives etc) they wish to trade.

Clients currently provide in many cases the entire stock collateral as a deposit and no cash or cash equivalent. The clearing member, however, is expected to maintain a 50/50 (minimum 50 per cent cash) ratio at the clearing corporation.

Brokers body Anmi had made representation to Sebi stating that the industry was not yet ready to migrate to the new system,

"The market intermediaries are not ready fully with tested APIs between  exchanges, clearing corporations and trading members. The front end systems from vendors are also not ready for segmental limits.There are also practical areas such as treatment of fund transfers via payment aggregators, which are not clear," said Sandip Raichura, CEO - retail broking and distribution, Prabhudas Lilladher. 

It's not clear whether the regulator would prefer a staggered approach to key areas like defining risk reduction at 90 per cent client level which not only is expensive for brokers but also may not be required given that the peak margin, segregated reporting norms are already in place, he added.  

"The intent is fine as all this tightening is necessary from a safety viewpoint but we would sincerely hope the regulator takes a more measured stance on implementation stagewise as it will lead to unnecessary business disruption," Raichura said. 

"Some brokers are providing consolidated segment balance to clients across equity, equity derivatives, currency and commodity. However, the broker will be self-clearing in the cash market segment and clearing derivative trades through different professional clearing members (PCM), sometimes even one PCM for equity derivatives and another for commodity derivatives. In such, scenario how will reporting and bifurcation of client funds happen between segments,"Anmi had written in one of its submissions to Sebi.