After rationalisation of exchange penalties, brokers seek similar relief on clearing penalties

After rationalisation of exchange penalties, brokers seek similar relief on clearing penalties

Brokers have termed the recent rationalisation of penalties by Sebi and exchanges as a Diwali gift, and are now expecting similar relief from clearing corporations. The issue has been raised mainly by clearing brokers, who say they often face penalties from clearing corporations and are burdened with multiple compliances. Clearing brokers are the brokers who handle the settlement part after execution of trades on exchange platforms.

Clearing brokers point out that client margin and segregation files must be uploaded every day, even for clients who have not traded for a year. Failure to report can attract a penalty of Rs 25,000. Similarly, they are required to issue daily demat holding statements despite the early pay-in and pay-out system, under which brokers cannot hold client funds or securities.

Clearing brokers are also required to submit internal audit reports on more than 50 points to each exchange and depository where they are members or participants. In case of any lapse, not only the clearing brokers but even the internal auditors receive notices.

They have also raised the issue of multiple compliance reports that must be filed separately with each exchange and depository, and are seeking a unified portal for all such filings. Clearing brokers further complain of penalties related to KYC issues, even though clients have already completed KYC with brokers, exchanges, and depositories.

Clearing brokers say they have voiced their concerns with regulator at forums but encouraged with the recent relief on exchange compliances, they are planning to represent in a detailed manner.

An email seeking comments from Sebi did not elicit any response.

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Brokers also face other types of penalties such as settlement shortages, security deposit shortages, short reporting of margins, margin violations, and client-level position limit breaches. However, brokers said they do not object to penalties where an actual breach occurs.

Brokers have welcomed Sebi’s and the exchanges’ recent move to rationalise penalties, and now expect similar relief for clearing compliances. A clearing broker, speaking on condition of anonymity, said, “The compliance framework was intended for safety, but for small brokers it has become burdensome. Since several safety measures are already in place, the compliance requirements for clearing brokers need a review.”

On October 10, Sebi and the exchanges announced the rationalisation and standardisation of the penalty framework for stock brokers. Under the new rule, only one lead exchange will impose penalties for common violations, preventing multiple penalties for the same infraction across exchanges.

To avoid reputational harm for minor errors, Sebi has replaced the term “penalty” with “financial disincentive” for procedural or technical lapses. Of the 235 violations reviewed, penalties on 40 have been removed, 105 converted into financial disincentives, and 90 retained with rationalised penalties.

The revised framework, which also applies to ongoing enforcement proceedings, aims to reduce compliance burden and promote consistency. Additionally, Sebi has expanded the Samuhik Prativedan Manch (SPM), a common compliance reporting system, to cover 30 more reports from October 15, further easing compliance costs for brokers.

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