Brokers' plea to tweak supervision norms doesn't cut ice with regulator

The proposals suggest that proprietary trades of the stock broker should not be netted against client trades

The Securities and Exchange Board of India (Sebi) has given a cold shoulder to brokers’ requests to modify proposals for enhanced supervision of the latter.

The regulator will now engage with stock exchanges to discuss the proposals, issued last year, to tighten compliance and prevent broker-related fraud.

Brokers had recently met the regulator and objected to proposals on maintaining of separate settlement accounts for proprietary trades and client trades. They feel this will significantly add to their compliance costs.

Proprietary trading involves use of a stockbroking firm’s own money. Currently, brokers make no distinction between proprietary and client accounts for settlement of trades. The proposals suggest proprietary trades of a stock broker not be netted against client trades and there be no transfer of funds from a client account to any other bank account, other than the client settlement account and the client’s own bank accounts.

Also, that fund transfers from a client account to a proprietary account be allowed only in specific cases such as recovery of brokerage, statutory dues and to meet a shortfall of debit balance in clients.

Brokers say opening a separate account for proprietary trades will push up costs and put pressure on settlement systems of intermediary back-offices, clearing corporations and depositories, which are designed to handle one settlement process per settlement cycle for a particular type of trade.

It is not clear when Sebi plans to implement these proposals. An e-mail to it did not get a response.

The proposals also say stockbrokers should upload data pertaining to client accounts every week. This includes the total fund balance available in all client bank accounts, covering the client settlement accounts maintained by the broker and the aggregate value of credit and debit balances.

While there is a quarterly settlement of funds with clients at present, brokers do not upload data on client balances with exchanges. Brokers have suggested a system of quarterly upload of client balances. Based on the red flags generated from this data, further details can be sought on a case to case basis, they say.

“As per Sebi’s current mandate, client accounts are settled every 90 days by all members of stock exchanges. No major defaults have been noticed by the regulators during inspections. The new process will be cumbersome and create more paperwork. Many brokers will go out of business because of high compliance cost,” said a broker, on condition of anonymity.

Several brokers have shut shop in the past few months due to high compliance costs, with the number of brokers in the cash segment almost halving in the past one year, show Sebi data.