Sebi proposes separating brokers from investors’ money

Market


Capital markets regulator Sebi on Tuesday proposed to discontinue the current practice of an advance transfer of funds to stockbrokers before secondary market trades are executed.

The move, aimed at safeguarding investors’ money from misuse and default by stock brokers, is similar to Application Supported by Blocked Amount (ASBA)-like facility already available for the primary market which ensures that money from an investor gets moved only when an allotment happens.

In its consultation paper, Sebi stated that the proposed introduction of a blocking of funds facility for trading in secondary markets will prevent misuse of client funds, brokers’ defaults and the consequent risk to investors’ capital.

This would provide client level settlement visibility (both pay-in and pay-out) to clearing corporations (CC) by direct settlement of funds and securities between client or investor and CC.

Under the existing framework, clients’ assets pass through stock broker and clearing member before reaching CC. Similarly, the pay-out released by CC follows a similar cycle of passing through clearing members and stock brokers before reaching the client.

While CCs provide final settlement instructions to their members each day, it is the stock broker who settles obligations with clients.

The Securities and Exchange Board of India’s (SEBI) move follows one by the Reserve Bank of India to allow a one-time blocking of funds in bank accounts and multiple debits through the unified payments interface (UPI) real-time payments system.

The RBI service “can be integrated with the secondary markets to provide a block mechanism (similar to pledge-like mechanism in securities),” Sebi said in the discussion paper.

Once implemented, it continued, investors can block funds in their bank accounts rather than transferring them upfront to brokers, “thereby providing enhanced protection of cash collateral.”

“This will also ensure that the interest on the funds is accrued to the investor and not to the broker,” a regulatory official said.

SEBI, however, did not spell out whether the blocking of funds would be voluntary or compulsory for retail investors.

“The thought process within the regulator is to make it mandatory for retail investors in a phased manner,” said the official cited above.

The regulator has sought comments from market participants until 16 February on any operational challenges on the proposed concept, associated processes, transaction flow and risk management.

With agency inputs


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