March 12, 2024
Introduction
SEBI has introduced Enhanced Supervision guidelines for stock broker to ensure the safety of investor funds and strengthen regulatory compliance among stock brokers. These guidelines emphasize real-time supervision, client fund protection, and financial integrity.
Why is Enhanced Supervision Important?
✅ Prevents misuse of client funds
✅ Enhances transparency in reporting
✅ Strengthens investor protection
✅ Detects financial stress in brokers early
SEBI mandates strict compliance with these guidelines, and violations can lead to penalties, restrictions, or cancellation of a broker’s registration.
Key Areas of Enhanced Supervision
Segregation and Monitoring of Collateral at Client Level
Background
The Segregation and Monitoring of Collateral at Client Level framework ensures complete transparency on the movement and allocation of client collateral across trading members (TMs), clearing members (CMs), and clearing corporations (CCs). The key objective is to enable end-clients to track their collateral in real-time.
SEBI’s circular dated July 20, 2021, introduced a framework requiring clearing members to disclose and report collateral at the client level.
The goal is to prevent fund misuse, ensure collateral visibility, and protect client interests in the event of a default.
Collateral Flow & Reporting Framework
Collateral moves through multiple layers:
Client → Trading Member (TM) – The client provides collateral to the TM.
TM → Clearing Member (CM) – TM passes on a portion of this collateral to CM.
CM → Clearing Corporation (CC) – CM transfers collateral to CC for margin purposes.
Daily Reporting Requirements:
Collateral details must be submitted by T+1 (cut off time) for each trade date.
Reports cover all segments and client-wise data.
Clearing members must report retention reasons for collateral that is not upstreamed to CCs.
Reporting of Retained Collateral
Clearing members are required to justify any collateral retained by reporting appropriate retention codes in the segregation file:
Reason Code | Description |
RC01 | Receipt of funds after stipulated cut-off time (5 PM). |
RC02 | FDRs in transit or under renewal, deposited within five settlement days. |
RC03 | MFOS in transit, pledged within the next settlement day. |
RC04 | Funds in DSCNBA pending bank processing. |
RC05 | Cheques issued but not cleared within five settlement days. |
RC06 | Funds credited back by CC due to OFS. |
RC07 | Funds not processed due to banking system failure. |
RC08 | Funds retained in DSCNBA on running account settlement days. |
RC09 | Other justified retention reasons. |
Members must ensure retention amounts are reported at a consolidated level across all clients.
Upstreaming of Client Funds to Clearing Corporations
Background
SEBI, through multiple circulars, has introduced a mandatory upstreaming mechanism to safeguard investor funds. This move aims to eliminate fund misappropriation risks by ensuring that all client balances are maintained securely with clearing corporations (CCs) rather than stock brokers (SBs) or clearing members (CMs).
The framework mandates that brokers do not retain any client funds at the end of the day (EOD).
Earlier, brokers had flexibility in fund movement, leading to instances of fund misuse and financial risk exposure.
The new framework ensures that all excess funds must be upstreamed to CCs in a secure and regulated manner via cash, lien-marked Fixed Deposit Receipts (FDRs), or pledged Mutual Fund Overnight Schemes (MFOS).
Operational Guidelines
Requirement | Details |
Upstreaming Process | Brokers must upstream all client financial ledger balances to CCs by EOD. |
Downstreaming Process | No fixed timeline, but brokers must ensure timely payouts to clients. |
Handling Late Client Fund Transfers | Funds received after 5 PM may be retained with proper justification. |
Justified Retention Reasons | Funds received after cut-off, pending payouts, bank delays, etc. |
Use of FDRs | Client-created FDRs are not permitted for upstreaming. |
Settlement Process Flexibility | Members can allocate funds within their internal accounts before transferring to CCs. |
Disclaimer-
For detailed Investment Restrictions for PMS, please refer to SEBI’s official website (www.sebi.gov.in). This content is for informational purposes only and should not be considered legal advice.
Commentaires