SEBI Issues Circular on Upstreaming of clients’ funds by Stock Brokers/Clearing Members to Clearing Corporations

SEBI Issues Circular on Upstreaming of clients’ funds by Stock Brokers/Clearing Members to Clearing Corporations

The Securities and Exchange Board of India (SEBI) has issued circular in connection to Upstreaming of clients’ funds by Stock Brokers (SBs)/Clearing Members (CMs) to Clearing Corporations (CCs) to protect the interest of investors in securities market.

In this regard, with a view to safeguard clients’ funds placed with SBs/CMs, SEBI decided to require the upstreaming of all client funds received by SBs/CMs to the Clearing Corporations (CCs).

As per the framework, no clients’ funds shall be retained by SBs/ CMs on End of Day (EoD) basis.

The clients’ funds shall all be up-streamed by SB/ CMs to CCs only in the form of either cash, lien on FDR (subject to certain conditions enumerated below), or pledge of units of Mutual Fund Overnight Schemes (MFOS).

FDRs created by SBs/ CMs out of clients’ funds are allowed subject to certain conditions.

According to the circular, “Units of Mutual Fund Overnight Schemes (MFOS) is a new avenue being made available to SBs/ CMs to deploy client funds into. MFOS ensures minimal risk transformation of client funds (that are withdrawable on demand) available with SBs/ CMs because of overnight tenure and exposure to only risk-free government securities.”

The SBs/ CMs may create FDRs out of clients’ funds only with those banks which satisfy the CC’s exposure norms as specified by SEBI or CCs from time to time. Every FDR created out of clients’ funds shall necessarily be lien-marked to one of the CCs at all times, and CCs should have explicit precedence on the FDR funds over every other stakeholder, including over the bank providing the FDR.

The tenure of such FDRs should not be more than one year and the FDR should be pre-terminable on demand. The principal amount of the FDR should remain protected throughout the tenure, even after accounting for all possible pre-termination costs.

The circular stipulated that the SBs/CMs should not avail any funded or non-funded banking facilities based on FDRs created out of clients’ funds.

Sebi has mandated stock brokers to maintain designated client bank accounts to receive or pay funds from/to their constituents.

For upstreaming via MFOS units, the SBs/CMs have to ensure that client funds are invested only in such MFOS that deploy funds into risk-free government bond overnight repo markets and overnight Triparty Repo.

and Dealing and Settlement (TREPS).

As per the circular, such MFOS units should be in dematerialised (DEMAT) form, and must necessarily be pledged with a CC at all times.

SBs/CMs shall maintain a dedicated DEMAT account (hereinafter referred to as “Client Nodal MFOS Account”) for subscription/ redemption of MFOS units. The depositories shall allow subscription/redemption transactions only in the said account.

Other than the FDRs (liened to CCs) and MFOS (pledged to CCs), any remaining client funds with SBs/ CMs shall be up-streamed to a CC before a stipulated cut-off time, said the circular.

Additionally, Clause 15.3.2.1 of SEBI’s Master Circular on Stock Brokers dated 17th May, 2023 mandates stock brokers to maintain designated client bank account(s) to receive/pay funds from/to their constituents. The nomenclature of all such accounts shall be changed to either of the following two categories of bank accounts:

a) Up Streaming Client Nodal Bank Account (USCNBA): SB/CM shall receive clients’ funds in USCNBA for further upstreaming it to the CCs. The nomenclature for such accounts shall be- Name of the SB/CM – USCNB account.

b) Down streaming Client Nodal Bank Account (DSCNBA): Payment to clients should be done only from DSCNBA account post receiving of funds from CC/CM same day and any balance left in the account post cutoff time should be transferred to USCNBA for further upstreaming it to the CCs. The nomenclature for such accounts shall be- Name of the SB/CM – DSCNB account.

In addition, CMs, who clear trades for other SBs, shall only use the designated bank account(s) maintained with the nomenclature- Name of the CM –TM prop account to receive/pay proprietary funds from/to stock brokers.

To improve operational efficiency and reduce transaction costs, CCs are directed to build a mechanism for the utilisation of surplus unutilised collateral lying with them in cash form, towards fund pay-in requirements across segments.

Moreover, to improve operational efficiency and to reduce costs, CCs will also facilitate a mechanism to adjust the margin blocked in the form of cash, towards client fund pay-in obligations. Such a mechanism will be provided by CCs by 1st January, 2024.

With respect to the monitoring mechanism the framework provided that the stock exchanges and CCs shall create a Standard operating procedure (SOP) for monitoring the implementation of provisions of this Circular and put in place a uniform penalty structure for non-compliance.