SEBI circular on Segregation and Monitoring of Collateral at Client Level

In order to further strengthen the mechanism of protection of client’s collateral from the twin problem of - misappropriation/misuse and default by the Brokers (also called Trading Members or TM) & Clearing Members (who settle all transactions- CM) - the Securities and Exchange Board of India (SEBI) had issued a circular on July 20^th, 2021 directing brokers to put systems and processes in place to mitigate the risk of misappropriation or misuse of client’s securities/funds available with the Trading Member (TM).

Some of the salient features of the SEBI circular were:

1. TM and CM would report disaggregated information (segment-wise and asset type wise break-up) of each client collateral.
2. CMs would be required to maintain at least 50% of the total collateral in the form of cash or cash equivalents with Clearing Corporation (CC). At individual client level, a client may have allocation of cash equivalent, less than the value of non-cash collateral provided by the client. In other words, the minimum 50% cash equivalent collateral requirement may not be applied at the client level.
3. CMs would be permitted to change the allocation of collateral deposited with the CC, subject to the value allocated to any client not exceeding the value of actual collateral received from that client

Why this requirement?

As an investor protection measure, it was thought that the broker reporting in a segment wise format to the exchanges will lead to higher transparency and clarity vis-à-vis viewing the funds and margins by the clearing members and exchanges. Such segment-wise collateral reporting system would prevent any misuse by any of the parties involved. It was done to ensure right use of funds, greater protection and security of customer assets and securities.

What’s the current status?

The implementation of the proposed SEBI circular has been postponed until the end of February 2022 as many market participants had pointed out that more time was needed to develop infrastructure and processes to implement the SEBI requirements.

How does it work at ICICIdirect?

ICICIdirect has always made use of a segregated method of collateral reporting for the ease of client experience. We have always had a segment-wise reporting of client’s collaterals. This has helped to achieve the twin goal of providing clients with clear and transparent information and also ease of reporting to the exchanges. Customer’s at ICICIdirect can allocate specific amount of funds to Equity and do not have to worry about these funds being pulled from their account in case there is excess margin requirement in their F&O trades. Clients can continue to trade without any additional bother.

Figure 1: Segment-wise fund allocation

Figure 2: Segregated Collateral Allocation

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