Zee Business Exclusive: Separation of prop and client account settlements coming soon. Will trading volumes go down?

A SEBI committee comprising brokers and exchanges has agreed on the proposal of segregation of proprietary and client account settlements. Proprietary trades are the trades that brokers do for themselves. SEBI has asked exchanges and clear corporations to sort out any operational issues in the implementation, according to sources aware of the development. “Exchanges or clearing corporations may not face any major operational issue as the tweaking is not a major one," said one source at the exchange level. 

What the working group suggested

The working group formed on the issue has suggested that brokers need to maintain separate clearing bank accounts and pool accounts for funds and securities settlement for client and prop trades. Clearing corporations will calculate net funds obligations for all segments, and net securities for the cash market and the F&O physical settlement. The net obligations of prop and client accounts will be calculated separately. Proprietary obligations will include net of clear broker prop and trading broker prop obligations. Similarly, client netting will include netting across clients. In case of stock lending and borrowing (SLB), prop and client funds settlements will also be separated. For, commodities, the net obligation will be calculated separately for prop and client accounts only concerning Mark to Market obligation.

What’s the thinking behind the proposal?

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 protect the interest of investors further.

How will the proposed process work?

Client settlement will need to be completed through client-clearing bank accounts and client-clearing pool accounts. If there is a fund shortage from the client side, the clearing broker needs to fill the shortage, and if there is a securities shortage from the client side, the same will be converted to the equivalent requirement of funds instead of securities, and then the clearing broker needs to make up the equivalent. After this, the proprietary pay-in of securities and funds will be followed. Once it is done, the payout will be done separately. The inter-clearing settlement under interoperability will be done on a net basis.  

Will Trading Volumes go down?

Some stakeholders raised concerns that such a proposal if accepted may impact volume because proprietary trading will then need separate funding for co-lateral and settlement. But the working group is of the view that there is unlikely to be any positive or negative impact of this on volume. Because the members were never supposed to use the client's funds for prop trading payments. However, some stakeholders raised concerns that with additional steps the process will get complicated and timelines for settlement will increase. SEBI will seek the views of all stakeholders as a process of regulation-making, so may come up with a consultation paper or issue a draft circular to seek the views.
 
Responting to a query of Zee Business on January 29 this year, the SEBI Chairperson has said that to avoid misuse, the segregation of prop and client account settlements is under examination.