Sebi to protect client assets by taking collateral out of brokers

Aimed to safeguard the client assets, the market regulator Securities and Exchange Board of India (Sebi) is finalising guidelines that propose a central collateral facility for client assets.

According to market sources, the regulator is in favour of creating single collateral holding entity in which clients can directly deposit their collaterals. Currently, the client collateral is deposited with the broker and broker uses it to meet the respective client margin and pay-in requirement.

Initially, Sebi floated the idea of depositing client collateral with a professional clearing member (PCM) in last year (in May 2013), which met with tremendous resistance from the broking community.

However, the arguments of the broking community have failed to convince the regulator, who opined that the present system doesn’t offer adequate safeguards for investor assets.

The segregation of the client collateral is lost due to lack of recognition of end client since the clearing corporation (CC) ends up viewing all collateral as broker collaterals.

“Clients in the present situation run the risk of losing collateral due to default credit risk of brokers,” said the source. Sebi believes that through central collateral holding facility brokers and CCs will be able to directly recognize such collateral and give exposure.

The industry explains that ‘who should hold the client collateral’ had been a perpetual area of confusion. “This would be the fourth time that the regulator is planning to change the policy around collateral holdings,” said a market participant.

Futures and options 

In the draft proposal Sebi has pitched that this move would be specifically for futures and options (F&O) segment.

“We look forward to every move to make the markets efficient. However, the challenge in this proposal would lie in the drafting of a practically implementable 5  member agreement between the client, the trading member, the clearing member, the proposed custodian and the clearing corporation,” said Uttam Bagri, Secretary, BSE Brokers Forum.

If this proposal by the market watch dog is cleared then in a case of client default, such collateral along with executing broker collateral will be available to CC for meeting client obligations.