A series of regulatory changes introduced in relation to access to client funds has boosted transparency and improved risk management for the stock market ecosystem, leading bourse National Stock Exchange (NSE) has said.
With effect from May 2, the Securities and Exchange Board of India (Sebi) has barred brokers from using one client’s collateral to fund another’s margins. To enable this, brokers have to segregate and report collateral at client level, failing which they will be slapped with heavy penalties.
In September 2020, the regulator replaced the erstwhile power of attorney (PoA) system with the so-called margin pledge and re-pledge mechanism. The move followed widespread misuse of client funds by brokers. In October 2021, Sebi directed exchanges, clearing corporations, and brokers to disclose cash collateral of clients on T+1 (trading day plus one day) basis.
“The regulatory guidelines of collateral segregation framework have been designed with the intent and aim of providing transparency and traceability of collateral to the investors, providing individual collateral segregation and protection for all investors; and improving portability and quick return of collateral,” said Vikram Kothari, managing director of NSE Clearing.
At present, NSE Clearing maintains about 50 million investor collateral accounts across segments identified under their brokers. This enables segregation and protection of client securities and cash collateral on an individual basis.
Exchange officials said they have taken a series of other steps to monitor brokers and for early-detection of any signs of misuse.
“Our offsite monitoring team detects any shortfall, if any, within a few days of reporting by brokers. We get information directly from banks and from clearing members and clearing corporations so that we can match and find inconsistencies. We are also closely monitoring margins that brokers collect from clients and client settlement of funds. For some top members, we do a more extensive analysis on an ongoing basis, over and above offsite supervision. System for monitoring client mark-to-market losses to check with ledger balance and value of pledged securities. We will look at client ledgers in specific situations,” said Priya Subbaraman, chief regulatory officer of NSE.
She said the NSE has been providing training and support to auditors, who can act as the “first line of defense”. The exchange has introduced a rule that auditors need to have a minimum of five years’ experience to audit brokers.
The NSE is also looking at registering and monitoring back office vendors. This will help improve quality and consistency of data and will also curb any practices of ledger manipulation.
The exchange has been cautioning first-time investors about dealing in options, particularly the ones that are less liquid and are deep out of the money.
Subbaraman said NSE has also issued multiple guidance to brokers to curb certain client acquisition practices, sharing of passwords, credentials and dealing in tips.