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Sebi develops system to detect misuse of client securities by stock brokers

This comes after Sebi observed that some brokers have misused clients' securities

Press Trust of India  |  New Delhi 

sebi
Sebi has also directed clearing corporations to share client level pay-in and pay-out obligations with depositories

regulator on Thursday said it has developed an online system to timely detect misuse of clients' securities by stock and alert exchanges in case of diversion of investors funds.

This comes after observed that some have misused clients' securities received as collateral to meet their own settlement obligation or obligations of other clients.

In fact, the regulator noticed that some have also misused clients' securities by pledging them with the banks and non-banking finance companies (NBFCs) to raise funds for their own use.

Consequently, the regulator developed an in-house online system by which it would be able to prepare client level securities holding register of the brokers, said in a statement.

Under the system, Sebi collects the details of the clients' securities submitted in weekly report filed by brokers with the exchanges and updates the same with trades conducted in the accounts of the clients using the data available in its data warehouse & business intelligence system as well as data provided by bourses, clearing corporations and depositories pertaining to auction trades, corporate actions and off market trades among others.

The securities holding balance computed is matched with the actual clients' securities holding in the demat account and submission made by the broker for the next day. Any mismatch in data is flagged as an alert for exchanges.

These reports are being generated by the regulator on a weekly basis and three such mismatch reports have already been forwarded to exchanges for reconciliation with members, the regulator noted.

"This system is likely to timely detect the misuse of clients' securities collected by brokers as collateral or received in pay-out of securities," the Securities and Exchange Board of India (Sebi) added.

In order to prevent the misuse of clients' securities by broker, Sebi said it has taken a number of policy measures including laying down early warning mechanism to detect diversion of clients' funds and securities, restricting broker to pledge clients' securities even with the consent of the client, securities to be transferred to client account within 24 hours of payout and mapping of unique client code with demat account of the client.

Further, Sebi has also directed clearing corporations to share client level pay-in and pay-out obligations with depositories, and depositories are required to check the corresponding debit or credit in the demat account of client and report mismatches to the exchanges. This has detected the diversion of clients' securities received in payout.

The Depositories Act provides for acceptance of client securities as collateral by way of pledge, the collateral of securities is accepted by way of title transfer of securities by brokers.

The client providing collateral in the form of securities needs to transfer his securities in the name of the broker and once the securities move out of the demat account of the client, Sebi said it is not possible for him to keep a track of use or misuse of those securities by the broker.

Moreover, a few brokers have been declared defaulter by the exchange not on account of failure to meet settlement obligation but in failing to meet liabilities/ dues to the clients. The available assets of the broker were found short to meet the clients' funds and securities obligations and accordingly, the regulator has come out with measures to prevent the misuse of clients' securities.

First Published: Thu, February 13 2020. 19:56 IST
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