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Handling Clients Securities by Trading/Clearing Members-SEBI Circular

CIR/ HO/MIRSD/DOP/CIR/ P/2019/75

June 20, 2019

To

All Recognized Stock Exchanges
All Recognized Clearing Firms All Depositories
All Buying and selling Members/Clearing Members by way of Stock Exchanges/Clearing Firms
All Depository Individuals by way of Depositories

Madam I Sir,

Sub: Handling of Clients’ Securities by Trading Members/Clearing Members

1. So as to shield shoppers’ funds and securities , The Securities Contracts (Regulation) Act , 1956 and Securities and Change Board of India (Inventory -Brokers) Laws, 1992 specifies that the stock dealer shall segregate securities or moneys of the shopper or shoppers or shall not use the securities or moneys of a shopper or shoppers for self or for some other shopper.

2. Additional, the next circulars have been issued by SEBI every now and then detailing the operational modalities with respect to dealing with of shopper’s funds and securities by stock dealer (hereinafter referred to as ‘Trading Member /Clearing Member’ or TM/CM):

(a) Circular SMD/SED/CIR/93/23321 dated November 18, 1993:

When it comes to clause 2 of the round SEBI had inter alia specified that “it shall be compulsory for all member brokers to maintain separate accounts for shopper‘s securities and to keep such books of accounts, as could also be needed , to differentiate such securiues from his/ their very own securities. Such accounts for shopper‘s securities shall, inter–alia provide for the following:–

(i) Securities absolutely paid for, pending delivery to shoppers;

(ii) Absolutely paid for shopper‘s securities registered within the identify of Member, if any, in the direction of margin requirements and so on.

(b) SEBI Circular MRD/ DOP/SE/Cir – 11/2008 dated April 17,2008:

Within the  stated round , SEBI had inter-alia  specified  that  ‘brokers ought to  have sufficient techniques and procedures in place to ensure that shopper collateral isn’t used for any purposes aside from meeting the respective shopper‘s margin necessities/pay-ins. Brokers should a/so keep data to ensure correct audit path of use of shopper collateral.

(c) Circular SEBI/ HO/MIRSD/ MIRSD2/CIR/ P/2016/95 dated September 26, 2016 and Circular no. CIR/HO/ MIRSD/ MIRSD2/CIR/ P/2017/64 dated June 22, 2017:

In the stated circulars , SEBI had specified that “stock brokers shall not grant additional publicity to the shoppers when debit balances come up out of shopper‘s failure to pay the required quantity and such debit balances continues beyond fifth buying and selling day, as reckoned from the date of pay-in, except in accordance with the margin buying and selling facility offered vide SEBI round C/R/MRD/DP/5412017 dated June 13, 2017 or as may be issued once in a while“

(d) Circular SEBI/ HO/MRD/DP/CIR/P/2016/ 13 dated December 16, 2016:

Within the stated round , SEBI had specified that “the member shall switch securities from pool account to the respective beneficiary account of their shopper inside 1 working day after the pay-out day. The securities lying within the pool account beyond the stipulated 1 working day shall appeal to a penalty at the fee of 6 foundation level per week on the value of securities. “

Subsequently , when it comes to the above provisions, all TM/CM are required to switch the shoppers securities acquired in pay-out to shoppers demat account inside one working day. In case the shopper doesn’t pay for such securities acquired in pay-out, then the TM/CM shall be entitled to retain these securities as much as five buying and selling days after pay-out. Additional, where the shopper fails to satisfy its funds abcaus.in pay-in obligation inside 5 trading days from pay­ out day, the TM/CM shall liquidate the securities out there to recuperate its dues. By no means , shall the securities of the shoppers acquired in pay-out be retained by the TM/CM beyond five trading days and be used for another function.

3. As per the provisions of the following circulars, TM/CM are permitted to offer operating account for securities and create a lien on the shopper securities to the extent of the shoppers’ indebtedness to the TM/CM.

(a) As per clause 12 of the SEBI round on ‘Dealings between a client and a Stock Broker’ dated December 03, 2009 a shopper might specifically authorize the stock dealer to take care of a operating account of ‘funds ‘ and ‘securities’ topic to the required circumstances.

(b) As per clause 5 of SEBI round on ‘Enhanced Supervision of Stock Brokers/ Depository Participants’ dated September 26, 2016 learn with clause 2 (c) of SEBI circular CIR/HO/ MIRSD/ MIRSD2/CIR/ P/2017/64 dated June 22, 2017 , “a inventory broker is entitled to have a lien on shopper ‘s securities to the extent of the shopper ‘s indebtedness to the stock dealer and the inventory dealer might pledge these securiues.“

Referencing the above said provisions , the TM/CM are transferring shopper’s securities into their very own account by means of title switch and then putting such securities as a collateral to Banks/NBFCs and/or fulfilling securities shortages of different shoppers/proprietary trades which isn’t contemplated within the provisions of the SEBI circulars referred to in paragraph 2.

four. To be able to present readability with respect to a TM/CM sustaining a operating account for shopper securities and pledging the shopper securities with Banks/ NBFCs, after discussions with the Exchanges, Depositories and Clearing Firms , the next advice is issued:-

four.1 The securities acquired in pay-out towards which cost has been made by shoppers , shall be transferred to the demat account of the respective shoppers within one working day of the pay- Such securities shall be transferred immediately from the pool account of the TM/CM to the demat account of the respective shopper.

four.2 With regard to securities that have not been paid for in full by the shoppers (unpaid securities) , a separate shopper account titled – “client unpaid securities account” shall be opened by the TM/ Unpaid securities shall be transferred to such “client unpaid securities account” from the pool account of the concerned TM/CM.

four.three The securities stored in the ‘client unpaid securities account’ shall either be transferred to the demat account of the respective shopper upon fulfilment of shopper’s funds obligation or shall be disposed off out there by TM/CM inside 5 trading days after the pay-out. The unpaid securities shall be bought from the Unique Shopper Code (UCC) of the respective Profit/loss on the sale transaction of the unpaid securities, if any, shall be transferred to/adjusted from the respective shopper account.

four.four In case the shoppers’ securities are stored in the ‘client unpaid securities account’ beyond seven trading days after the pay-out, the depositories shall underneath their bye-laws levy applicable penalties upon such TM/CM which shall not be permitted to be recovered from the shopper.

4.5 SEBI round (on Complete Evaluation of Margin Buying and selling Facility) dated June 13, 2017 specifies that TM/CM shall keep separate shopper clever ledger for funds and securities of shoppers availing margin trading Accordingly , the securities which are purchased beneath Margin Buying and selling Facility, shall be stored in a separate account titled as – ‘Client Margin Trading Securities Account’.

four.6 Further stated circular on Comprehensive Evaluation of Margin Trading Facility also specifies that:

(a) For the aim of providing the margin trading facility, a inventory broker might use own funds or borrow funds from scheduled business banks and/or NBFCs regulated by RBI. A inventory dealer shall not be permitted to borrow funds from another source.

(b) The inventory dealer shall not use  the  funds  of  any  shopper  for  providing the margin trading facility to a different shopper, even if the identical is permitted by the first shopper.

Additionally , SEBI vide Circular No. MRD/ DOP/SE/Cir – 11/2008 dated April 17, 2008 had specified that shopper collateral/securities shall not be used for the purposes aside from meeting shopper’s margin requirements/pay-in.

Referencing the above said provisions, TMs/CMs are pledging collateral/securities of the shoppers with the Banks/ NBFCs to borrow funds to satisfy the margin requirement of the shoppers/proprietary obligation which is not contemplated within the provisions of the aforesaid SEBI circular. In this regard, it’s reiterated that the shopper securities acquired as collateral shall be used only for meeting the respective shopper’s margin requirement by means of depositing the identical with Stock Trade/ Clearing Corporation/ Clearing House.

4.7 With impact from September  01, 2019 , shoppers’ securities  mendacity with the TM/CM  in “client  collateral account” , “Client  Margin Trading  Securities  account” and “client unpaid s.ecurities account” cannot be pledged to the Banks/NIBFCs for elevating funds , even with authorization  by shopper abcaus.in as the same would quantity to fund based mostly exercise by TM/CM which is in contravention of Rule 8(1)(f) & 8(3)(f) of Securities Contracts (Regulation)  Guidelines, 1957.

4.eight Further, the shopper’s securities already pledged when it comes to clause 5 of SEBI Circular SEBI/HO/ MIRSD/ MIRSD2/CIR/ P/2016/95 dated September 26, 2016 and clause 2 (c) of SEBI round CIR/ HO/MIRSD/MIRSD2/CIR/ P/2017/64 dated June 22, 2017 shall, by August 31, 2019 ,both be unpledged and returned to the shoppers upon fulfilment of pay-in obligation or disposed off after giving notice of 5 days to the shopper.

4.9 Accordingly , the clause 5 of SEBI Circular SEBI/HO/ MIRSD/ MIRSD2/ CIR/P/2016/95 dated September 26, 2016 and clause 2 (c) of SEBI circular CIR/HO/ MIRSD/ MIRSD2/CIR/ P/2017/64 dated June 22, 2017 stands deleted with effect from June 30, 2019.

5. Opening and reporting of Demat Accounts by TM/CM:

As a way to implement the above, the following course of action shall be taken by TM/CM:

(a) All the prevailing shopper securities accounts opened by the TM/CM aside from ‘Pool account'( including ‘Early Pay-in’), ‘Ciient Margin Trading Securities account’ and ‘Client collateral account’ shall be wound up on or before August 31, 2019. The TM/CM shall within one week of closure of present shopper accounts, inform the Inventory Change/s the small print in the following format:

Identify of DP Account Number/ Shopper ID DP ID Identify of Account PAN Date of closing

(b) TM/CM shall open the unpaid securities account latest by August 31, 2019 and inform the small print of the identical to the respective Stock Exchanges / Clearing Firms inside one week of opening of the unpaid securities account within the following format:

Identify of DP Account Quantity/ Shopper ID DP ID Identify of Account PAN Date of closing

(c) Any non-compliance/non reporting on this regard by the TM/CM shall appeal to penal action as per the bye-laws of Stock E

6. Monitoring with respect to dealing with of shoppers securities:

Stock  Exchanges , Clearing  Firms  and  Depositories  shall  put  in  place  a mechanism for monitoring of the following:

(a) Handling of unpaid shoppers’ securities by the TM/CM – Mechanism of matching of switch of securities with the securities obligation as obtained from the clearing corporation with respect to the following:

(i) Securities transferred from the shopper unpaid securities account to the pool account

(ii) Securities transferred from  the  shopper  unpaid securities  account  to the involved shopper account ,

(iii) Securities transferred from pool account to the involved shopper account

(b) All of the DP accounts tagged as “Stock Broker – Client Account ” are wound up before August 31, 2019

(c) Securities mendacity with TM/CM in shopper collateral account , shopper margin trading securities account and shopper unpaid securities account shall not be permitted to be pledged/transferred to Banks/ NBFCs for raising funds by TM/CM.

  1. Accordingly, the provisions with regard to operating account settlement of shoppers’ funds and securities specified in SEBI Circulars MIRSD/ SE /Cir-19/2009 dated December 03, 2009 and SEBI/HO/ MIRSO/ MIRS02/CIR/P/2016/95 dated September 26, 2016 shall stand modified to the extent as said hereinabove and the stated circulars shall be relevant solely as tips for operating account settlement of shoppers’ “funds” only.

8. Until in any other case specified within the round the provisions of this round shall come into effect on September 01, 2019. Any non-compliance of the provisions issued beneath this round shall appeal to the penalty and different enforcement action as could also be laid down by Exchanges , Clearing Firms, Depositories and SEBI.

9. The Inventory Exchanges , Clearing Firms and Depositories are suggested to:

(a) Deliver the provisions of this round to the notice of all TM/CM, Depository Individuals along with illustration as required and in addition disseminate the same on their respective web sites.

(b) Make needed amendments to the related bye-laws, rules and laws for the implementation of this round in co-ordination with one another to realize uniformity in strategy.

(c) talk to SEBI, the standing of the implementation of the provisions of this round in their Monthly Improvement Stories.

10. This round is being issued in train of powers conferred beneath Part 11 (1) of the Securities and Trade Board of India Act , 1992 to protect the pursuits of buyers in securities and to advertise the event of, and to manage the securities market.

11. This round is accessible on SEBI website at www .sebi.gov.in underneath the categories “Legal Framework”.

Yours faithfully ,

Rajesh Kumar Dangeti
Basic Supervisor