Tightening the grip: Sebi's daily transfer diktat to further pinch brokers

In a new paper, Sebi has proposed the daily transfer of client funds to clearing corporations

The Securities and Exchange Board of India (Sebi) has proposed measures mandating daily upstreaming of all investor funds from stockbrokers to clearing corporations (CCs). The step, aimed at reducing risk on client funds, will further deplete brokers’ revenues as they will lose interest income with transfers being done daily.

At present, stockbrokers convert the surplus funds into bank guarantees (BG) or fixed deposit (FD) receipts which earns them extra income. If the surplus is required to be transferred to CCs daily, stockbrokers stand to lose this income.

In a consultation paper floated last week, Sebi said that investor funds in surplus of exchange margin requirements may be placed by CCs in very low-risk and liquid overnight money market instruments.

“CCs will enjoy float and earn interest on the same. Brokers will not be able to create FD/BG of client funds as it will be required to be transferred as received by them. Ideally, FD should be permitted and CCs should share interest earnings in floats with brokers,” said Kamlesh Shah, president, Association of National Exchanges Members of India — a broking lobby.

Brokers are of the view that the proposed rules will increase the cost of transaction, causing a lot of operational issues and heightening the burden of compliance.

Stockbrokers will have to deduct the required respective brokerage and statutory charges before upstreaming the funds to CCs at the end of the day.

An analysis of listed stockbrokers’ last quarterly result showed that their interest income stood at around 30 per cent for some players. Experts said that interest income for other stockbrokers could be as high as 20 per cent of total revenue.

According to the last quarterly running account settlement done on January 6, nearly Rs 46,000 crore of investor funds was held with brokers and clearing members. Sebi noted that the amount could be even higher on other days.

Nearly 1,355 stockbrokers are not subject to all the regulatory safeguards that other financial institutions are. The additional measures by the regulator are steps aimed at mitigating the risk of fall of a stockbroker or the misuse of funds.

Earlier in January, Sebi had issued another consultation paper on blocking of funds for secondary market transactions which will reduce client float lying with stockbrokers. The blocking of funds will be facilitated by the Unified Payments Interface. However, Sebi believes it may not eliminate such surpluses with brokers and thus the requirement for additional proposed measures.

“The problem is that there needs to be clarity or guidelines on managing client payouts. A 6 pm is impractical because the exchange sends trade files to brokers much later. Exchanges must complete the trade process and provide files well before 6 pm to avoid operational nightmares and unnecessary conflict regarding margin penalties,” said Tejas Khoday, co-founder and chief executive officer, Fyers.

For compliance with the proposed norms, stock exchanges will have to obtain independent confirmation of all end-of-day broker account bank balances from banks.

“While this proposal could reduce the float income implicitly enjoyed by brokers and clearing members, the risk of fund misuse in the ecosystem should reduce substantially,” said Sebi.

The capital markets regulator has sought public comments on the proposals until February 17.

Tightening the grip

Big stockbrokers have interest income of about 20-30% of total revenue

1,355 stockbrokers are not subject to all the regulatory safeguards that other financial institutions are

According to the last running account settlement, nearly Rs 46,000 cr of investor funds were held with brokers

Under proposed norms, brokers will not be allowed to park funds as bank guarantees or fixed deposits

Sebi recommends daily upstreaming to clearing corporations which may invest surplus in money market instruments