The Sebi’s move to designate some of the country’s top brokers as qualified stock brokers (QSBs) may increase compliance costs for these entities.
Certain stock brokers handle a very large number of clients, a large amount of client funds and very large trading volumes. Any possible failure of such brokers has the potential to cause a widespread impact on investors and reputational damage to the Indian securities market. To mitigate this risk, the Sebi board approved amendments to the Sebi (Stock Brokers) Regulations, 1992 to designate such brokers, based on identified parameters, as QSBs.
“Three of our RTAs are called qualified RTAs because they handle very, very large volumes of investor data and transactions. They have certain additional requirements which they have to comply with over and above the regular RTAs. In order to mitigate the concentration risk of top brokers, enhanced risk management criteria will be laid down that will cover market risk, IT risk and cyber risks, among other things. Much higher standards will be expected of them and there will be a obligation on MIIs and on Sebi to monitor them. The frequency of inspection and the regularity of review will be greater,” Sebi chairperson Madhabi Puri Buch said on Tuesday.
As of now, 16 brokers will be designated as QSBs. A detailed framework on QSBs is expected soon.
“This is a good move and will help in reducing the systemic risk for the capital markets. Most of the top brokers have already put in place measures to monitor market and operation risks. QSBs will now have some additional reporting requirements and may have to depute additional manpower to meet the enhanced risk management framework,” said B Gopkumar, chief executive of Axis Securities.
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He added that the exact impact will be known only after the regulator comes up with detailed guidelines for the QSBs. Bank-based brokers are adequately prepared to handle additional requirements since they are already subject to additional oversight from the RBI, he said.
“Brokers handle hard-earned money of a large number of clients and there have been many instances in the past where investors couldn’t square off their positions on time due to technical glitches on many leading trading applications. Sebi’s guidelines on QSBs will instill more trust in investors and would help curb the potential to cause such widespread impact. The higher vigilance in terms of risk management will boost the standards of Indian securities market even though it will come at a cost to the brokers,” said Deepak Singh, chief business officer, Reliance Securities.
Sebi has gradually been tightening regulations for stock brokers, especially after the Karvy episode which involved misuse of client securities. The regulator changed rules regarding pledging of shares and came out with a framework for segregation and monitoring of collateral at the client level.
Brokers now have to do a quarterly or monthly settlement on a specific date, which is the first Friday of each quarter or the first Friday of every month. Clients’ running accounts will be considered settled only by making actual payment into their bank accounts and not by making any journal entries. Clients are to be intimated by SMS and email.
Peak margin rules were introduced last year, which dictate a short-margin penalty – ranging from 0.5-5% of the shortfall per day – if brokers fail to secure the minimum margin for intraday positions.
All brokers are now subject to audit of their cyber security frameworks every three months by the exchanges.