SEBI Puts Off Client Collateral Segregation to 28-Feb

In a circular issued after market hours on 23-November, SEBI announced that it was postponing the implementation of the framework for segregation and monitoring of collateral at client level to 28th February 2022.

In addition, even the implementation of the stringent rule stipulating 50% margin requirement for futures and options trades, has also been put off from 01-Dec to 28-Feb, giving relief to F&O traders.

The new system of client collateral segregation was to be effective from 01st December 2021, but now that will be applicable only from the 28th of February next year.

Markets and brokers get a 3-month breather. For the brokers, this would come as a reprieve as it was apprehended that these measures would have impacted volumes.

First, a quick background. As per the new framework, brokers will have to report segment-wise and asset-wise break-up of each client collateral. This was triggered by the Karvy fiasco wherein the company had pledged client shares with banks and financiers to raise funds by doing off-market transfers to its group companies.

It is expected that the new disaggregated system of reporting will protect clients from any misuse by TMs or even CMs.

The new system is supposed to have multi-level hierarchy of reporting. For example, the TM (trading member) would report disaggregated information on cash and collaterals up to the level of its clients to the CM (clearing member).

In turn, the CM will report disaggregated information on collaterals and cash up to the level of TM clients and proprietary collaterals of TMs to the stock exchanges as well as to clearing corporations on a daily basis.
 

Here are some interesting implications

1) A web portal facility will be provided by clearing corporations to enable clients to view disaggregated collateral reporting by TM/CM and highlight discrepancies, if any.

2) Clearing Corporation will use collateral allocation information to ensure that the collateral allocated to a client is used towards margin obligation of that client only.

3) False allocation by members will be treated as a violation and will entail disciplinary action against the members.

4) If applicable client margins for a client in a segment exceeds collateral allocated and securities collateral re-pledged, then proprietary collateral of TM/CM will be blocked.

The checks and balances in the new system are quite stringent. However, the brokers and the market infrastructure institutions had represented to SEBI about the practical difficulties of shifting to the new system of reporting from 01-December.

As a result, SEBI has agreed to put off the implementation by 3 months to 28-February. This new client wise collateral reporting and mapping will be effective from the last day of February.

The Karvy saga had raised serious question about the sanctity of client collaterals and power of attorney given to the brokers. The POA issue has already been addressed. Addressing the collateral disaggregation will help to make the markets safer for investors and traders.

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