New Sebi rule from today: A ban that’s a boon in many ways
May 1, 2023
Synopsis
This move of SEBI further increases the working capital requirement of stock brokers. This will only affect brokers who have the practice of pledging clients' funds to create BG for their own use and increase the leverage and risk exposure of clients. For brokers who have already fallen in line with the recent implementations of Segregated Margin Reporting and online client wise / segment wise allocation of client collaterals, this circular would only be of academic interest.
Starting May 1, 2023, stock brokers and clearing members in India will no longer be allowed to use their clients' funds for bank guarantees, according to a ruling by the Securities and Exchange Board of India (Sebi).
Usually, banks issue bank guarantees on behalf of stockbrokers to stock exchanges for security deposits and margin requirements. These guarantees are submitted at clearing corporations, which then determine the brokers' trading limits. However, brokers often pledge their clients' funds with banks, which in turn issue bank guarantees for higher amounts. Banks issues BG at 2 times the amount pledged by the Broker, this exposes the market to risks. As per the circular no new BGs shall be created out of clients’ funds from May 1, 2023. Existing BGs created out of clients’ funds are to be wound down by September 30, 2023
Sebi has expressed concern that this practice exposes the market and clients' funds to risks. Some brokers reportedly obtain bank guarantees worth twice the amount of fixed deposits they have placed using clients' funds, creating a significant disparity between their true net worth and the guarantees utilized for trading.
To address this issue, Sebi has mandated that brokers must use their own working capital to obtain greater Clearing Corporation limitations, thereby increasing their working capital demand. Additionally, Sebi has ordered brokers to wind down any existing bank guarantees created using clients' funds by September 30, 2023.
The Reserve Bank of India (RBI) and Sebi have been monitoring the collateral system closely due to the potential systemic risks posed by the practice. The new ruling aims to mitigate these risks and ensure greater protection for investors' funds.
Tradeplus welcomes SEBI's recent move to prohibit the utilisation of clients' funds for the creation of Bank Guarantees.
This move of SEBI further increases the working capital requirement of stock brokers. This will only affect brokers who have the practice of pledging clients' funds to create BG for their own use and increase the leverage and risk exposure of clients. For brokers who have already fallen in line with the recent implementations of Segregated Margin Reporting and online client wise / segment wise allocation of client collaterals, this circular would only be of academic interest.
The new requirement is interesting to note, especially when the discussions are on with the regulator’s plans to implement ASBA and upstreaming of client funds.
Brokers must ensure that their own funds are not affected by this new framework. To make sure everyone plays by the rules, Sebi will monitor and report on any violations of this circular and ensure that brokers comply with the provisions within the stipulated timeframe.
This move by Sebi is a step in the right direction towards ensuring greater accountability in the securities market and protecting the interests of investors.
[The Economic Times]
