INVESTOR PROTECTION - SEBI makes it mandatory for brokers to report client-level collateral, releases framework; trading member, clearing member be WARY - No MISUSE
The Securities and Exchanges Board of India on Tuesday has made it mandatory for brokers to report client-level collateral in an apparent framework for segregation and monitoring of collateral at the client level on the back of amid instances of misuse of client collateral by trading members.
The Securities and Exchanges Board of India on Tuesday has made it mandatory for brokers to report client-level collateral in an apparent framework for segregation and monitoring of collateral at the client level on the back of amid instances of misuse of client collateral by trading members.
The move comes in the wake of the Karvy Stock Broking crisis where clients’ shares had been pledged illegally as collateral against the loan.
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According to the circular issued by SEBI regarding ‘segregation and monitoring of collateral at the client level’, the capital market regulator has put in place a reporting mechanism that will entail disaggregated information, segment-wise, and asset type-wise break-up, of each client collateral.
The measures laid out by SEBI in a framework are expected to strengthen the mechanism of client protection from misuse by the trading member (TM) or clearing member (CM) and default of such members and other clients.
SEBI has said a reporting mechanism covering both cash and non-cash collateral will be specified by the clearing corporations in a view to provide visibility of client-wise collateral at all levels
Hence, the trading member would report disaggregated information on collaterals up to the level of its clients to the clearing member.
Further, clearing members would report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the exchanges and clearing corporations, which is expected to be done on a daily basis.
In this regard, a web portal facility would be activated by the clearing corporations/exchanges to allow clients to view disaggregated collateral reporting by TM/CM.
SEBI pointed out, "Any false allocation by members shall be treated as a violation and disciplinary action shall be taken against the members." Both the TM and CM must ensure, sufficient collateral is allocated to clients to cover their margin requirements.
SEBI said the framework to reporting mechanism and collateral deposit and allocation will come into effect from October 1, 2021, while other provisions will become effective from December 1, 2021.
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