Futures industry body concerned over Sebi's networth norms for brokers

The global derivatives industry body says client balances should not be treated as a proxy for broker risk and warns that higher capital requirements could increase costs

Futures Industry Association (FIA), a global body representing brokers and derivatives market participants, has raised concerns over market regulator Securities and Exchange Board of India’s (Sebi’s) proposal to revise the variable networth framework for stock brokers, arguing that client balances should not define broker risk. 

FIA said the proposed framework should be based on actual risks faced by brokers and not account for risks that are already addressed through existing safeguards such as upfront margins, collateral controls, and upstreaming of client funds. 

Sebi had proposed linking brokers’ variable networth requirements to the scale and risk of their operations based on metrics such as aggregate client funds, the number of active clients, and clients onboarded through authorised persons (APs). Alongside average client credit balances, the regulator proposed an additional networth requirement of ₹50 lakh for brokers with 10,000-50,000 active clients and a further ₹50 lakh for every additional 50,000 clients. For clients sourced through APs, the requirement would range from ₹5 lakh for up to 2,500 clients to ₹50 lakh for every additional 10,000 clients beyond the initial threshold. 

The market regulator has said the changes are intended to serve as a “second line of defence”, ensuring brokers maintain sufficient capital to cover risks not addressed through margin requirements. 

However, FIA said increasing networth requirements based on client deposits could result in capital being held against exposures that have already been substantially mitigated or removed from brokers’ balance sheets. “It may also have the effect of penalising brokers for maintaining or encouraging higher client collateral buffers, even where those buffers strengthen default resilience,” the association said. 

The body also argued that the proposal risks conflating client-related risk with proprietary trading risk, despite the two being conceptually distinct. “If proprietary trading risk is the relevant regulatory concern, it should be addressed directly and calibrated by reference to the broker’s proprietary exposures, rather than through proxies such as client deposits or client count,” FIA said.

Sebi introduced the variable net-worth framework in 2022, requiring brokers to maintain capital equivalent to 10 per cent of the average daily cash balances retained from clients over the preceding six months.  

However, FIA noted that the framework has become less effective following the implementation of the upstreaming mechanism, under which client funds are transferred to clearing corporations, leaving brokers with minimal client cash balances. 

While acknowledging that India’s framework materially reduces the risk of client assets being exposed to broker insolvency, FIA said any revised capital requirement should be carefully calibrated to reflect actual residual risks borne by brokers. 

The association warned that higher capital requirements could ultimately be passed on to investors through increased trading costs and may unduly impact smaller intermediaries. It instead suggested targeted measures such as enhanced concentration margins for large or correlated positions and explicit capital-linked limits on proprietary trading activity.

 

Key highlights

Proposed parameters for net worth

Average credit balance: 10% of average credit balance of all clients of previous six months across segments/exchanges

Number of active clients: ₹50 lakh if broker has active clients between 10,000-50,000; Additional ₹50 lakh for subsequent 50,000 active clients

Clients through Authorised Persons (APs): ₹5 lakhs for up to 2,500 clients, ₹25 lakh for up to 10,000 clients, and ₹50 lakh for every additional 10,000 active clients