Sebi comes up with a framework to monitor client collateral

The adage ‘better late than never’ aptly fits market regulator Sebi (Securities exchange board of India) latest framework on segregation and monitoring of collateral at the client level. This move comes after there have been several instances of brokers defaulting and misusing client’s securities and funds. While margin collection by brokers for derivatives trading came into play almost two decades ago.

Until now, the clearing corporations (CC) of stock exchanges, which settle the trades, identified all the margin collected as that of the trading members (TM, which is a broker) or clearing members (CM), even if it belonged to clients.

Sebi in its circular said that clearing corporations should specify a reporting mechanism that would provide visibility of client-wise collateral, covering both cash and non-cash, at both the broker and clearing corporation level. The reporting structure should entail disaggregated information both segment-wise and asset type-wise break-up of each client collateral.

The measures will help in further strengthening the mechanism of protection of client collateral from misuse by the trading member (TM) or clearing member (CM) and default of such members and other clients.

The regulator said a web portal facility should be provided by the stock exchanges to allow clients to view the disaggregated collateral reporting by brokers.

Sebi also said in the case of bank guarantees, the broker may consider the unfunded portion of the bank guarantee as proprietary collateral. “Any false allocation by members shall be treated as a violation and disciplinary action shall be taken against the members,” Sebi said in a circular on Tuesday.