The Securities and Exchange Board of India (Sebi) plans to put in place a mechanism to ensure that the client money or float does not remain with brokers even for a single day.
The regulator aims to implement this in the next six months and has formed a committee to streamline the process for the same.
A lower float could impact revenues for brokers and will necessitate a higher working capital. This is because idle balances lying in a trading account earns interest income for a brokerage firm.
“The intention is to see that brokers do not retain any cash. The money will be transferred to the clearing corporation (CC) in the evening of trade day and returned to the clients the next day.
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Bank brokers that provide a 3 in 1 account to clients have the option of blocking the money (rather than debiting it) or parking the excess float with the CCs,” said a person in the know.
Today, clients of non-bank based brokers who want to place trades have to transfer the money to their ledger accounts.
For bank-based brokers, the requisite amount is drawn from the customer’s account and blocked.
At the end of the day, the unutilised amount gets unblocked.
According to earlier regulations, brokers had to settle the client’s unused funds lying in the trading accounts at least once in 90 days (every quarter) or 30 days.
This was on a rolling settlement basis and referred to as “running account settlement” or “quarterly settlement of funds”.
The aim was to prevent misuse of excess cash by brokers.
Under the new norms, the entire industry has to do the quarterly or monthly settlement on a specific date, which is the first Friday of each quarter or the first Friday of every month.
Client’s 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.
In 2021, Sebi had held extensive consultations with stock exchanges and industry representatives to devise a framework to mitigate the risk of misuse of client’s funds.
Plans on product suitability
The regulator also plans to come out with a framework on product suitability for clients.
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This will, for instance, restrict the exposure to, say F&O products, based on the net worth or income of the client.
So, if the client has a net worth of Rs 2 crore and s/he takes exposure to products that can wipe out the net worth, the exposure on the product will be restricted.
“This is so that clients do not get into excessive speculation. The client may be allowed to bet on derivatives to the extent of 50-60% of income or 3-5 times the net worth,” said a person familiar with the matter.
In June, Sebi had reached out to the country’s top brokers, asking them to furnish details of F&O clients, including age, income range, city and the profits made from trading in the segment in the year before and after the pandemic.
Trading in the options segment of the exchanges has touched a record high in the past year amid an uptick in margins in the futures segment, increased activity from algo traders, a weekly expiry cycle and the entry of new traders in the aftermath of the Covid-19 pandemic.