Sebi makes it mandatory for brokers to report client-level collateral

Markets regulator Sebi on Tuesday came out with a framework for segregation and monitoring of collateral at client level amid instances of misuse of client collateral by trading members.

Also, it has put in place a reporting mechanism that will entail disaggregated information -- segment-wise and asset type wise break-up -- of each client collateral, according to a circular.

The measures will help in further strengthening the mechanism of protection of client collateral from misuse by trading member (TM) or clearing member (CM) and default of such members and other clients.

The move comes in the wake of the Karvy Stock Broking crisis where clients' shares had been pledged illegally as collateral against loan.

Segregation of client collateral refers to the procedures that enable identification and protection of client collateral from misuse by trading or clearing member and protection from default of such member or other clients.

With a view to providing visibility of client-wise collateral (for each client) at all levels-- trading member, clearing member, and clearing corporation (CC), Sebi said a reporting mechanism covering both cash and non-cash collateral will be specified by the CCs.

Under this,TM would report disaggregated information on collaterals up to the level of its clients to the CM.

Further, clearing member would report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the exchanges and clearing corporations. This information would be required to be reported on a daily basis.

Besides, a web portal facility would be provided by the clearing corporations/ exchanges to allow clients to view disaggregated collateral reporting by TM/CM.

In case of securities collateral provided to CC through margin pledge or re-pledge in the depository system, Sebi said CC has visibility of the client to whom such securities belong to, and accordingly is able to assign the value of the securities collateral, based on applicable haircut, to that client's account.

Similarly, for other forms of collateral placed with the CC, the CCs will provide a facility to CMs for upfront segment-wise allocation of collateral to a TM/ client or CM's own account.

The CCs will use such collateral allocation information to ensure that the collateral allocated to a client is used towards the margin obligation of that client only.

It further said there will be no change in the procedures pertaining to placing of securities as collateral through the margin pledge or re-pledge mechanism in the depository system, and this collateral will be identified as belonging to a client or as being proprietary securities of the TM or CM, as per the existing procedures.

According to Sebi, allocation provided by the CM to CC and by TM to CM will be considered as final by the CC and CM respectively for the purpose of granting exposure and utilisation during default.

"Any false allocation by members shall be treated as a violation and disciplinary action shall be taken against the members," the Securities and Exchange Board of India (Sebi) noted.

The TM/CM will have to ensure that sufficient collateral is allocated to clients to cover their margin requirements.

However, if the client margin applicable at the CC for a client in a segment exceeds the collateral allocated to the client plus the securities collateral re-pledged to CC (from that client's account) in the respective segment, then the proprietary collateral of the TM/CM will be blocked.

Also, Sebi has laid down guidelines on collateral deposit and allocation, collateral valuation, blocking of margin, withdrawal of collateral and default and default management process.

The regulator said the framework pertaining to reporting mechanism and collateral deposit as well as allocation will come into effect from October 1, while other provisions will become effective from December 1.