Brokers will need to set up separate business unit to participate in NDS-OM; SEBI releases guidelines

NDS-OM is an order matching system that can be used by investors for secondary-market trading in government securities.

SEBI-registered stock brokers can participate in government securities in the Negotiated Dealing System-Order Matching (NDS-OM) by setting up a separate business unit (SBU), said a circular issued on Tuesday.

The market regulator also said that all activities of the business unit of stock broker facilitating trading on NDS-OM would be under the jurisdiction of the respective regulatory authority.

NDS-OM is an order matching system that can be used by investors for secondary-market trading in government securities.

The Securities and Exchange Board of India (SEBI) released the guidelines on February 11 to ringfence the activities of stock brokers and its NDS-OM activities, after the Reserve Bank of India permitted non-bank brokers to participate in NDS-OM to facilitate ease of use for retail investors.

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The safeguard introduced by SEBI are the following:
1.Stock brokers shall ensure that activities of the NDS-OM under a SBU are segregated and ring-fenced from the securities market related activities of the stock broker and arms-length relationship between these activities are maintained;

2. Such SBU shall be exclusively engaged in activities of transacting on NDS-OM only;
3.3 Stock brokers shall prepare and maintain a separate account for the SBU on arms-length basis;
3.4 The net worth of the SBU shall be kept segregated from the net worth of the stock broker in the securities market. Net worth criteria for stock broker shall be satisfied after excluding account of the SBU.

SEBI also said that, since the SBU dealing with this would come under a different regulatory authority, SEBI's grievance redressal mechanism and investor protection fund (IPF) will not be available for investors using the services of SBU.

Ajay Garg, CEO, SMC Global Securities, "This move will increase awareness among retail investors to trade in G-Secs and help in directly placing orders through brokers. It will also help in improving liquidity and reducing the complexities of trading in the secondary market. In summary, stockbrokers stand to benefit from broader retail participation in a regulated, liquid, and efficient market which will help in expanding their offerings and customer base."