Sebi gives more time to comply with rules on client-level segregation, monitoring of collaterals

Capital markets regulator Sebi on Thursday deferred implementation of the new regulations on client-level segregation and monitoring of collaterals till May 2.

This is the second time the regulator has extended the deadline to comply with the rule. Initially, the regulator had given time till December 1, 2021, which was extended to February 28, 2022.

In a circular, Sebi said it has received requests from various stakeholders to further extend the timeline. After consideration of the same, it has been decided to further extend the deadline till May 2, 2022.

Under the new framework, a Trading Member (TM) and Clearing Member (CM) have to report disaggregated information (segment-wise and asset type-wise break-up) of each client collateral.

Besides, clearing members will be required to maintain at least 50 percent of the total collateral in the form of cash or cash equivalents with Clearing Corporations (CCs).

At the individual client level, a client can have allocation of cash equivalent, less than the value of non-cash collateral provided by the client. The minimum 50 percent cash equivalent collateral requirement will not be applied at the client level.

Clearing members guarantee trade settlement to stock exchanges on behalf of clients.

For the purpose of monitoring of at least 50 percent cash-equivalent collateral at the level of clearing member, the excess cash-equivalent collateral of a client will not be considered for other client or for proprietary account of trading or clearing member.

In a separate statement, K K Maheshwari, President of Association of National Exchange Members of India (Anmi), has welcomed Sebi's announcement to extend the timelines for implementing segregation and monitoring of collateral at client level.

"Sebi should consider granting waiver of penalties for three months thereafter to comply fully with the said circular as brokers need to educate their clients," he added.

The new rules for segregating and monitoring is aimed at further strengthening the mechanism of protection of client collateral from misuse by trading member or clearing member and default of such members and other clients.

The move came in the wake of Karvy Stock Broking crisis where clients' shares had been pledged illegally as collateral against loan.

Segregation of client collateral refers to the procedures that enable identification and protection of client collateral from misuse by trading or clearing member and protection from default of such member or other clients.

With a view to providing visibility of client-wise collateral (for each client) at all levels -- trading member, clearing member, and clearing corporation -- a reporting mechanism, covering both cash and non-cash collateral, will be specified by the clearing corporations.

Under the framework, a TM would report disaggregated information on collaterals up to the level of its clients to the CM.

Further, a CM would report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the exchanges and clearing corporations.

This information would be required to be reported on a daily basis. Besides, a web portal facility would be provided by the clearing corporations/ exchanges to allow clients to view disaggregated collateral reporting by TM/CM.

On Wednesday, Anmi, on behalf of 900 stock brokers in the country, said it has written to Sebi on the practical difficulties in implementing segregation and monitoring of collateral at client level and asked the regulator for more time to comply with the guidelines.

Among difficulties, Anmi said web portal facility by the clearing corporation/stock exchange, to allow clients to view disaggregated collateral reporting by TM/CM, has not been provided.