Sebi puts in place framework for upstreaming of clients' funds by brokers to clearing corps

To safeguard clients’ funds, capital markets regulator Sebi on Thursday came out with a framework that requires the upstreaming of all client funds received by stock brokers to clearing corporations.

Under the framework, no clients’ funds will be retained by stock brokers on an end-of-day (EoD) basis. Further, clients’ funds will be upstreamed by stock brokers and clearing members to clearing corporations (CCs) only in the form of either cash, lien on Fixed Deposit Receipt (FDR) or pledge of units of mutual fund overnight schemes, Sebi said in a circular.

Other than the FDRs (liened to CCs) and mutual fund overnight scheme (pledged to CCs), any remaining client funds with brokers will be upstreamed to a CC before a stipulated cut-off time. The new framework will come into effect from July 1, 2023, the Securities and Exchange Board of India (Sebi) said.

With regards to upstreaming through FDRs created out of clients’ funds, Sebi said stock brokers may create FDRs out of clients’ funds only with those banks which satisfy the CC’s exposure norms. Further, every FDR created out of clients’ funds would necessarily be lien-marked to one of the CCs at all times. The tenure of such FDRs will not be more than one year and the FDR should be pre-terminable. Besides, the principal amount of the FDR will remain protected throughout the tenure, even after accounting for all possible pre-termination costs. According to the regulator, mutual fund overnight schemes are a new avenue being made available to stock brokers to deploy client funds.

Sebi asked stock brokers to ensure that client funds are invested only in such Mutual Fund Overnight Schemes (MFOS) that deploy funds into risk-free government bond securities. MFOS units should be in dematerialised form, and must necessarily be pledged with a CC at all times.

Sebi has mandated stock brokers to maintain designated client bank accounts to receive or pay funds from/to their constituents.

To improve operational efficiency and reduce transaction costs, CCs will build a mechanism for the utilisation of surplus unutilised collateral lying with them in cash form, towards fund pay-in requirements across segments. Moreover, to improve operational efficiency and to reduce costs, CCs will also facilitate a mechanism to adjust the margin blocked in the form of cash, towards client fund pay-in obligations. Such a mechanism will be provided by CCs by January 1, 2024.

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