Sebi proposes rules to curb possible misuse of investors' money by brokers

To curb possible misuse of investors' money by brokers, Sebi has proposed to stop trading members and clearing members from retaining any part of client funds at the end of day and move the entire funds to the clearing corporation on the same day. At present, when an investor places funds with a broker a portion of such money is retained by the broker, and a part by the clearing member, before passing the remaining amount to the clearing corporation.

In its consultation paper, the regulator has proposed mandating daily upstreaming of all investor funds from stock brokers and clearing members (CMs) to Clearing Corporations (CCs). Investor funds in surplus of exchange margin requirements may in turn be placed by CCs in very low-risk and liquid overnight money market instruments.

The proposal also considers independent daily confirmation to investors around their daily funds position in the securities market ecosystem. While the proposal could reduce the float income implicitly enjoyed by brokers and CMs, the risk of fund misuse in the ecosystem should reduce substantially. In addition, investors will retain the flexibility to improve returns on their surplus funds using other duly authorised and suitable financial service providers.

The measures are aimed at further safeguarding investor funds placed with their stock brokers and clearing members. "While several steps have been taken by Sebi over the years to safeguard investors' securities and funds, a significant amount of investor funds may still be vulnerable to the risk of potential misuse," the regulator pointed out.

Explaining further, the regulator said that on January 6, the day of the last running account settlement, about Rs 46,000 crore of investor funds was held with brokers and CMs. Moreover, the number may be even higher during other days. It may also be noted that the country's 1,355 stock brokers are not subject to all the regulatory safeguards, it added.

The Securities and Exchange Board of India (Sebi) has sought comments from the public till February 17 on the proposals. In the proposed framework, Sebi said that stock brokers should place the entire clients' funds with the CM with segment-wise, Unique Client Code (UCC) wise allocation of collateral. The CM would in turn place these funds with the CC, allocated against the concerned client. The client funds placed with CC should be marked as cash collateral against the respective client.

It has been proposed that CCs should make available the information pertaining to utilized collateral, surplus funds and early-pay-in funds to respective clients on an online portal on CC websites and also by sending SMS and email on a daily basis.

According to Sebi, the stock broker should request for the release of funds to CM and CM in turn request to CC for release of funds on a daily basis to meet the funds pay-out requests or settlement of bill-to-bill clients and any balance remaining end of the day with them towards client payables should be placed back with CC on the same day to ensure that no client funds are retained by stock brokers or CM.

CMs would be able to place release requests any time during the day till 6 PM. CCs should check for the releasable amount and release the funds to CM accounts within two hour of the request received from CM. The CM should transfer the funds to a stock broker, for onward transfer to the investor on the same day.

With regard to the treatment of brokerage and other charges, Sebi said that the stock broker should perform client wise daily reconciliation, and deduct the required respective brokerage and statutory charges prior to upstreaming of clients' funds to CC at EoD. The contract note sent to clients should mention all the relevant charges levied to the client.

The proposed framework would have no impact on the Running Account Settlement obligations of stock brokers, Sebi said.

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