SEBI allows brokers to invest clients’ fund in overnight MF schemes
December 12, 2023
Funds must be in demat form and pledged with clearing corporations
Capital market regulator SEBI has allowed stock brokers and clearing members to park client funds in mutual fund overnight schemes as they invest only in risk-free government securities.
Brokers and clearing members should ensure that the overnight schemes invest only in government bond, overnight repo markets and overnight Tri-party Repo Dealing and Settlement (TREPS). Such Mutual Fund Overnight Schemes (MFOS) units should be in dematerialised (demat) form and must necessarily be pledged with a clearing corporation at all times.
In June, SEBI had specified framework for SB/CMs to upstream clients’ funds to clearing corporations with a view to safeguard clients’ funds placed with stock brokers and clearing members.
However, the market regulator had received representation from various stakeholders including stockbrokers and brokers’ associations citing certain operational difficulties in implementation.
In order to address the issue, SEBI advised the industry associations to consult with market infrastructure institutions under the aegis of Broker’s Industry Standards Forum and submit a proposal so that the principle of upstreaming is complied with and operational difficulties are suitably addressed.
Key criteria
The recommendations made by ISF have been considered by SEBI as a step towards ease of doing business. The basic principles include that SBs andCMs will upstream clients’ clear credit balances to CCs on End of Day basis, such upstreaming shall be done only in the form of either cash, lien on Fixed Deposit Receipts (FDRs) created out of clients’ funds, or pledge of units of MFOS created out of clients’ funds, it said.
Stock brokers should maintain designated client bank account. The nomenclature of all such accounts shall be changed to Up Streaming Client Nodal Bank Account for receive clients’ funds and Down Streaming Client Nodal Bank Account for payment to clients.
All payment requests of the client to release funds during the day will be processed on or before the next settlement day.
The bank instruments provided by clients as collateral cannot be upstreamed to CCs, and they will be ineligible as collateral in any segment of the securities market. However, in the interest of encouraging and development of hedging in the commodity derivatives market, it has been decided to allow bank guarantees provided only by non-individual clients with declaration and underwriting that they shall have no recourse to SEBI or exchanges in case of wrongful invocation of such BGs by SB/CM.
[The Hindu Business Line]
