Sebi floats consultation paper for ASBA-like process for trading

The consultation paper is a series of reforms the market regulator has come up with to reduce risks,

In another attempt to further reduce risks for traders, the Securities and Exchange Board of India (Sebi) has floated a consultation paper to discuss blocking of funds in the bank account itself rather than transferring them to trading accounts.

The market regulator is seeking public comments on the introduction of a facility for blocking funds for trading in secondary markets which allows investors to trade in the secondary market based on blocked funds in one’s bank account thereby eliminating the need to transfer funds to stock brokers.

The discussion will also entail providing client-level settlement visibility (both pay-in and pay-out) to clearing corporations by direct settlement of funds and securities between the client and clearing corporation.

If realised, this will be similar to the Application Supported By Blocked Amount (ASBA) procedure used in applying for initial public offers (IPO) and other primary market issues. Under ASBA, the fund, though blocked, remains in your account earning interest.

Sebi said the proposed process by design safeguards clients’ assets from misuse or brokers’ default and consequent risk to their capital.

In the current system, a trader needs to transfer the fund to his or her trading account which is used as collateral for trading. Stock brokers for their proprietary trades and for trades of their clients in turn post collateral with their clearing member, who then again post collateral with clearing corporations to carry out the settlement of trades.

In this setup, the consultation paper said, there is a possibility that a client’s collateral retained with a stock broker or clearing member can be misused. Similarly, the pay-out due to the client can also be at risk in case the stock broker defaults.

Sponsor-less AMCs possible in India? SEBI thinks yes; calls for opinions

The proposed setup can revamp the entire process and do away with the need to post collateral at brokers and caring members. The clearing corporation can itself handle the entire procedure directly.

In this setup, a trader will use your trading account to just place orders and the fund will be blocked in a linked bank account.

3-in-1 accounts not entirely safe
Many bank-based brokers provide 3-in-1 accounts where a trader can seamlessly transfer funds between bank account and trading account on need basis. But, this is not entirely foolproof, Sebi said.

“Although the funds are held in client’s bank account, the lien is marked in favour of the broker, thus possibility of misuse of client funds by stock broker persists. Since the stock broker is responsible for settlement with the client, the risk of non-settlement of pay-out by the stock broker remains,” it said.

The consultation paper is a series of reforms the market regulator has come up with to reduce risks since the Karvy Stock Broking went belly up. This includes higher margin requirement and periodic return of surplus funds, among others.