July 02, 2024
In a significant move aimed at enhancing transparency and fairness in the securities market, the Securities and Exchange Board of India (SEBI) has unveiled sweeping reforms regarding charges levied by Market Infrastructure Institutions (MIIs). These reforms, encapsulated in SEBI/HO/MRD/TPD-1/P/CIR/2024/92 dated July 01, 2024, mandate a fundamental overhaul of the existing charge structures.
Background
MIIs, acting as pivotal regulators, are entrusted with the crucial responsibility of ensuring equitable access and transparency for all market participants. However, SEBI's scrutiny revealed discrepancies in the prevailing volume-based slab-wise charge models adopted by some MIIs. This has resulted in brokers who handle large volumes receiving rebates on charges. These structures often resulted in aggregated charges collected from end clients by members exceeding the actual charges payable to MIIs, thereby potentially misleading investors.
The SEBI Directive
Following deliberations with the Secondary Market Advisory Committee (SMAC), SEBI has laid down stringent guidelines aimed at rectifying these disparities:
True to Label Principle: MIIs must ensure that charges levied on end clients by members accurately reflect the charges received by MIIs themselves.
Uniform Charge Structure: Moving away from volume-based slabs, MIIs are now required to adopt a uniform charge structure applicable equally to all members, irrespective of their size or activity volume.
Benefit to End Clients: The redesigned charge structure should prioritize reducing overall charges for end clients, aligning with existing per unit charge realities.
Implementation and Impact
MIIs are directed to swiftly implement these reforms, effective from October 01, 2024. This directive underscores SEBI's commitment to investor protection and market integrity, empowering MIIs to foster a level playing field and bolster market confidence.
Industry Reaction
The reforms have sparked varied reactions within the financial community. Industry leaders, including prominent figures like Nithin Kamath of Zerodha, foresee significant adjustments ahead, potentially impacting prevalent business models such as zero brokerage offerings.
For some brokers, these rebates contribute about 10% of the revenue. This can vary between 10% to 50% for other brokers in the industry," Kamath stated. "Over the last four years, our rebate revenue has grown from approximately 3% to 10%, primarily due to the increase in options trading turnover. Currently, 90% of our rebate revenue comes from options trading. However, with SEBI's new circular, brokers will no longer earn these rebates.
Kamath's remarks underscore the financial implications for discount brokers, indicating a potential reduction in revenue streams previously derived from options trading activities. This adjustment is expected to prompt strategic shifts among brokerage firms, potentially impacting business models that heavily rely on volume-driven incentives.
End of Discount Brokers?
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