Sebi releases framework for stock brokers, clearing members to upstream client funds

For upstreaming via MFOS units, the SBs/CMs have to ensure that client funds are invested only in particular schemes

The market regulator has released the framework for stock-brokers and clearing members for the upstreaming of client funds.

The Securities and Exchange Board of India (Sebi) had decided on the upstreaming of all client funds held by stock-brokers (SBs) and clearing members (CMs) to protect client funds.

In the latest circular, Sebi has said that the client funds have to be upstreamed to the clearing corporation (CCs) only in the form of cash, lien on fixed-deposits receipts (FDRs) or the pledge of units of Mutual Fund Overnight Schmes (MFOs).

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“Units of Mutual Fund Overnight Schemes (MFOS) is a new avenue being made available to SBs/ CMs to deploy client funds into. MFOS ensures minimal risk transformation of client funds (that are withdrawable on demand) available with SBs/ CMs because of overnight tenure and exposure to only risk-free government securities,” said the circular.

Upstreaming via FDRs and MFOS units are subject to certain conditions.

The SBs/ CMs may create FDRs out of clients’ funds only with those banks which satisfy the CC’s exposure norms as specified by SEBI or CCs from time to time. Every FDR created out of clients’ funds shall necessarily be lien-marked to one of the CCs at all times, and CCs should have explicit precedence on the FDR funds over every other stakeholder, including over the bank providing the FDR.

The tenure of such FDRs should not be more than one year and the FDR should be pre-terminable on demand. The principal amount of the FDR should remain protected throughout the tenure, even after accounting for all possible pre-termination costs.

The circular added that the SBs/CMs should not avail any funded or non-funded banking facilities based on FDRs created out of clients’ funds.

For upstreaming via MFOS units, the SBs/CMs have to ensure that client funds are invested only in such MFOS that deploy funds into risk-free government bond overnight repo markets and overnight Triparty Repo Dealing and Settlement (TREPS). Such MFOS units should be in dematerialised (demat) form, and must necessarily be pledged with a CC at all times, stated the circular.

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The SMs/CMs are to maintain a separate demat account to hold these units. From this account, the SBs/CMs can provide MFOS units as collateral to the CC. This should be provided along with the identification of the end client.

Other than the FDRs (liened to CCs) and MFOS (pledged to CCs), any remaining client funds with SBs/ CMs shall be upstreamed to a CC before a stipulated cut-off time, said the circular.