ZeeBiz Exclusive: Clients and brokers may get interest income on margin and collateral money kept in cash
SEBI has analyzed the data of financials of the major 4 clearing corporations of the last 5 years, from 2018-19 to 2022-23, data suggests that clearing corporations are earning substantial interest or income from clients or brokers collaterals and margin money.
Market regulator Securities and Exchange Board of India (SEBI) is considering a proposal in which clearing corporations can share the interest earned on cash, kept as margin money and collateral, with them. As per sources, the proposal was discussed with clearing corporations and other stakeholders last month. Broadly an agreement was reached on the proposal. Now basic legal framework is to be examined, whether such interest income distribution, may have any legal challenge. Clearing corporations are the entities that settle the trades after securities are traded on exchanges, they handle confirmation, settlement, and delivery transactions.
The idea is to distribute such interest income earned from clients or clearing members, margin money, or collateral periodically by clearing corporations either as a refund or add the same amount in the collateral of clients or clear members (clearing brokers). The basic premise of the proposal is that these deposits or collaterals are not owned by clearing corporations but is kept with them in the fiduciary capacity as part of a regulatory requirement. Before sharing the interest income, clearing corporations will be free to deduct any cost, regulatory charge, or tax as applicable to them on such income.
As per sources aware of the discussion, SEBI did a comprehensive study of the data before coming up with a proposal. SEBI has analyzed the data of financials of the major 4 clearing corporations of the last 5 years, from 2018-19 to 2022-23, data suggests that clearing corporations are earning substantial interest or income from clients or broker's collaterals and margin money. As per data such interest income contributes 26-55 per cent of the total income of the clearing corporations in the last 5 years.
As per industry sources, more than 90 per cent of the collateral is in the form of bank e-fixed deposits, bank guarantees, and other approved securities, but still on a daily basis around Rs 20,000 crore of the amount goes across all four clearing corporations on a gross basis, as a margin money and settlement obligation. Brokers earn interest on such fixed deposits.
The regulator believes that after the introduction of upstreaming of client's funds to clearing corporations, the cash element at clearing corporations is likely to go up further and increase the interest income from collaterals and margin money.
SEBI has also cited global practices, like that of Fixed Income Clearing Corporation (FICC) under the US capital market regulator US SEC. FICC invests available cash deposits in its clearing fund in various short-term vehicles and then the interest income is shared with participants.
SEBI has also asked clearing corporations to mandatorily segregate their own funds and clients and broker's funds kept as collateral so that regulators can have a clear view.
An email sent to SEBI did not elicit a response.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.