Brokers seek grandfathering of client FDs already submitted for margin purpose

Equity market brokers are against a SEBI circular that directs them to submit only client fixed deposit receipts (FDRs) with a maturity period below 365 days for margin purpose to clearing corporations (CCs). Brokers say that such a requirement will lead to huge losses for their clients, since most have submitted FDs with maturities beyond 365 days, and any premature withdrawal may lead to huge penalties. On July 26, brokers’ association ANMI wrote a letter to SEBI explaining the pain, seeking grandfathering of longer duration FDRs submitted up to July.

In the normal course, brokers submit thousands of crores worth of bank FDs to clearing corporations of stock exchanges to avail trading limits. For client-related trading limits, brokers submit FDRs gathered from clients. For proprietary trades, brokers submit their own FDRs. But a SEBI circular of June 6 says that FDRs not fulfilling SEBI conditions will not be valid post-July 1.

SEBI circular has stipulated certain conditions for "upstreaming of client circulars" by stock brokers to the clearing corporations. Upstreaming is nothing but brokers collecting the FDs from clients and submitting them to clearing corporations. 

The SEBI circular stipulated that every FDR should be lien marked to the clearing corporations and its tenure should not be more than one year. Also, such FDs should be pre-terminable on demand and the principal amount of the FDR will remain protected throughout the tenure, even after accounting for all possible pre-termination costs. SEBI also said that brokers cannot avail any funded or non-funded banking facilities based on FDRs created out of client funds.

Brokers have urged SEBI that the maturity of their FDR should be grandfathered, meaning FDRs already submitted up to July 2023 be allowed.

"We urge the maturity period of the existing FDs to be grandfathered and the new FDs to be created post-July 1, 2023 be allowed beyond 365 days as not only there is a gap in the returns between an FD of 365 days and 365 + 1 day but also of higher tenure of maturities. Our members will be at a loss in earning FD returns due to the cap of 365 days. If there are apprehensions on FD maturity of 365 + days, please let us know the concerns which we can address to the extent possible or suggest alternative measures," read ANMI’s letter to SEBI, accessed by Zee Business.

Further, the ANMI letter states that restricting the receipt of funds from clients, particularly in the case of clients having MTM (market to market), will cause unnecessary hardship to brokers and clients. "If the receipt of clients funds are restricted then the client may not be able to trade in the morning of the next trading session and the brokers may also have problems in meeting the T+0 for FNO and T+1 settlement for the cash market," the letter read.

Confusion on FDRs for proprietary trading limits 

Also, ANMI has initiated discussions with a clearing corporation that is insisting on implementing new FDRs norms for proprietary trades as well even though SEBI circular has no mention about it, a member told Zee Business.
 
"One of the CCs was creating confusion on submission of FDRs for proprietary traders. Trades done by brokers in their own books and not for any of the clients are proprietary trades. Brokers say while an exchange has informed them that upstreaming of clients’ funds is not applicable to the extent of proprietary funds, a CC issued a clarification last week saying that all existing FDRs lien marked to it will have residual maturity of 1year and FDRs not fulfilling the requirements shall need to be released by July 01, 2023," a broker said.

Email sent to SEBI on the ANMI letter remained unanswered.

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