Brokers face operational issues in client fund rules, request Sebi for relaxation

The Association of National Exchanges Members of India (ANMI) as well as Bombay Stock Exchange Brokers' Forum (BBF) have approached the regulator seeking a relaxation in the guidelines

The change in the process of transferring client funds to the clearing corporation and returning client funds under the new guidelines from Sebi is causing operational challenges, brokers say.

The Association of National Exchanges Members of India (ANMI) as well as the Bombay Stock Exchange Brokers' Forum (BBF) have approached the regulator seeking a relaxation in the guidelines, which have been introduced to prevent misuse of client funds by brokers. Sources told Moneycontrol that the regulator was receptive to the brokers’ concerns and some tweaks to the rules could be on the cards.

The mandatory upstreaming of clients’ funds before the cut-off time of 6:30pm every trading day, as well as reporting the details daily, has increased manpower and capital requirement at the brokers’ end, as per the associations. The practice came into effect from September 1.

Also Read: Brokers seek relaxation on SEBI audit firm rule, term it ‘discriminatory'

What is this all about? 

The current practice requires multiple fund movements - from clients to USCNBA (Up Streaming Client Nodal Bank Account), from USCNBA to settlement, from settlement to clearing corporation, from CC to settlement, from settlement to DSCNBA and from DSCNBA (Down Streaming Client Nodal Bank Account) to clients.

Earlier, upstream and downstream accounts were a combined entity called broker’s client account.

To avoid misuse of funds, the new rules stipulate that the USCNBA and DSCNBA accounts be emptied every day. The former should be emptied by 6:30pm, followed by a debit freeze, and the latter by end of day. The funds should lie with the clearing corporation only.

However, the strict cut-off time is causing significant operational difficulties and affecting the client servicing processes, as per BBF. While Moneycontrol has reviewed the email sent to Sebi by the brokers’ forum, a BBF representative declined to comment on the matter.

An executive of a Delhi-based broking firm explained, “Brokers have several upstreaming accounts with different banks. This is because intra-bank fund transfer, from client to broker, is easier. Suppose, there’s a technical difficulty in one of the banks and the funds are not transferred on time. In that case, whose fault is it? Why should the broker be liable?”

Violations above Rs 10 crore attract a penalty of Rs 5 lakh from brokers in cases of upstreaming and downstreaming of client money.

There are also many cases wherein the client decides to transfer additional funds after 6:30pm. In that case, the brokers cannot be discouraging the clients from doing so. “Furthermore, due to the debit freeze, brokers are unable to invest the money in liquid funds or overnight debt instruments and generate any return,” the executive added.

Also Read: Migration to one-hour and then instantaneous trade settlement soon: SEBI chief Buch

Fund payout on the same day

Sebi also requires that all fund payout requests received from clients by 6pm are processed on the same day. But this requires deallocation, release, inter-bank transfer by clearing member/broker and external bank transfer to client.

The brokers’ forum has requested the regulator to let payout requirements be modified based on internal policy formulated by clearing members. These policies can be displayed on CMs’ websites.

A Mumbai-based broker explained that earlier, based on the average payout requirement as indicated by historical data, broking firms would net off the amount from broker’s client account and transfer the rest to clearing corporation. “Now, netting is not allowed now and all of client funds have to be up-streamed. Requests for payout has to reach clearing corp at least one hour before cutoff time, following which they will run necessary checks and then give the money in downstream account. In this process, technical glitches can happen in any level.”

Also Read: Norges Bank may vote against ICICI Securities delisting proposal as shareholders seek higher valuation

“Based on client requests, a broker might pre-empt a larger payout amount and ask for funds from clearing corp accordingly. But after margin calculation, if the payout works out to be smaller, then the remaining amount in downstream will go to upstream, where they will be frozen. In that case, who takes the blame,” the broker questioned.

Brokers have suggested the extra funds lying in settlement account be named as “placed with CC” and thereafter step 3 and 4 of the fund movement be made optional. And in case of funds received after cut off time in upstream account, those be tagged as “retained by trading member”.

In each step, brokers are also required to give ‘reason codes’. “This granular level of data and micro-management has made our lives difficult,” brokers said. Moneycontrol has sent an email query to SEBI and the story will be updated once we hear from them.