Stock market regulator SEBI (Securities and Exchange Board of India) on February 24 issued an updated circular wherein it has extended the deadline to implement the new systems of compliance pertaining to segregation and monitoring of collateral at client level.
As per the original notice issued on July 20, 2021 the new compliance framework was supposed to come in force from December 01, 2021 but it had to be postponed due to the fiasco related to Karvy Stockbroking where clients’ shares had been pledged illegally as collateral against loan.
On November 23, 2021 SEBI had set the date of February 28, 2022 for implementation to happen but the regulator has decided to postpone it once again citing requests from various stakeholders for the postponement of the same. The new date for implementation has now been fixed as May 02, 2022.
In its original notice issued in July, the regulator had asked the clearing corporations to specify a reporting mechanism that will provide visibility of client-wise collateral, covering both cash and non-cash, at both the broker and clearing corporation level. It had also specified that mechanism should capture disaggregated information on both the segment and asset type of each client collateral in the following manner:
TM (Trading Member) shall report disaggregated information on collaterals up to the level of its clients to the CM (Clearing Member).
A CM shall report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the SEs (Stock Exchanges) and CCs (Clearing Corporations) in respect of each segment.The information to be shared on daily basis by TM for its transactions with CMs has to include information pertaining to:
It had asked that the web portal facility should be provided by the stock exchanges to allow clients to view the disaggregated collateral reporting by brokers.
Segregation of client collateral refers to the procedures that enable identification and protection of client collateral from misuse by trading or clearing member and protection from default of such member or other clients.
In terms of collateral valuation, the new ruling specified by SEBI emphasized that CMs are required to maintain at least 50 percent of the total collateral in the form of cash or cash equivalents. At individual client level, a client may have allocation of cash equivalent, less than the value of non-cash collateral provided by the client.
In other words, the minimum 50 percent cash equivalent collateral requirement may not be applied at the client level. For the purpose of monitoring of at least 50 percent cash-equivalent collateral at the level of CM, the excess cash-equivalent collateral of a client shall not be considered for other client or for proprietary account of TM/CM. However, the excess cash-equivalent collateral of proprietary account of TM/CM can be considered for clients trading/clearing through them, for the purpose of monitoring minimum 50 percent cash-equivalent requirement.
“This measure was a good step taken by SEBI to reduce the risk and protect the interests of the investors”, said Manoj Dalmia Founder & Director, Proficient Equities Limited.
According to Ashish Rathi, Whole Time Director, HDFC Securities, “apart from requests from various stakeholders, reasons for postponement were multiple - Clearing Corporations readiness in terms of implementation of the same was not there, similarly brokers back office and front office vendors were not fully ready and also some clarifications from Clearing Corporations were also pending”.
Some clarifications and technological advancements would be required before it is implemented. “It’s not an easy one given the current form of regulations”, Rathi added.
What will be the impact of postponement?
Experts are of the opinion that deferment is likely to create positive sentiments in markets in the short run.
“The rule would have led to many retail investors trimming their derivative trades as the margin requirement witnessed a steep hike”, said Rajesh Palviya, VP - Technical and Derivative Research, Axis Securities.
Most brokers had already started collecting 50 percent cash margin from derivative traders even though the circular was effective from February 28th.“Cash margin requirements had also started putting pressure on brokers for additional cash margin to reduce their risk”, Palviya added.