SEBI exploring segregation of netting of obligations at client and prop trades for settlement

Market regulator Securities and Exchange Board of India (SEBI) is exploring the idea of segregation of broker's own trade settlement and client trade settlement. In a reply to a question asked by Zee Business on steps under consideration to check misuse of proprietary trading accounts by brokers, SEBI Chairperson Madhabi Puri Buch said, “We can also look at the segregation of settlement so that there is no netting between client and proprietary”. SEBI Chairperson was speaking at an event of Brokers Industry Standards Forum at NSE.   
 

What’s the rationale behind the proposal?

Sources aware of the development told Zee Business that the issue was discussed recently with all stakeholders, and SEBI is of the view that almost all the loopholes related to misuse of client's funds and securities have been covered, but netting of obligations is still a cause of concern and may pose systemic risk. The concern is that the current practice is prone to misuse as the obligations of the clients from net long positions to the clearing corporation is offset by the obligation arising out of the short positions of the proprietary trades and vice versa. The idea is to further protect the interest of investors.

What has Working Group suggested?

SEBI had formed a Working Group on the issue comprising of relevant stakeholders. And the committee has submitted its recommendations and suggested various measures to deal with the issue. As per sources, the working group has proposed to maintain separate clearing bank accounts and pool accounts for funds and securities settlements for client and proprietary trades.

It has also suggested that clearing corporations will calculate net funds securities obligation for cash and F&O physical settlement. These net obligations will be calculated separately for proprietary and client accounts. Client net obligations will include netting across clients.

The proposal is proprietary and client funds settlements in stock lending and borrowing (SLB) should also be segregated. For the commodities segment the net obligations are to be calculated separately for proprietary and client accounts only for the daily mark-to-market (MTM) obligation.

Some concerns

Some stakeholders have raised concerns that such a proposal, if accepted, may impact volume because proprietary trading will then need separate funding for collateral and settlement. But the regulator believes that there is unlikely to be any positive or negative impact of this. There will be further rounds of discussion over the matter.

SEBI Chairperson further added, “There are some people who are permitting access to their clients through prop account for a variety of reasons, including wanting to fund their margin”. As per SEBI chief, the industry has made a representation to the regulator to clarify that there are different revenue models that brokers have and some may look like a misuse but it's not.