Brokers on edge as Sebi account settlement deadline approaches
The Securities and Exchange Board of India (Sebi) diktat on pending settlement of accounts is expected to result in outflows of thousands of crores from brokers’ cash balances on October 7, which will impact trading volumes in the coming days and on brokerage activities.
Under previous regulations, brokers had to settle unused client funds in trading accounts at least once every 90 days (every quarter) or 30 days. This was a rolling settlement and called “current account settlement” or “quarterly fund settlement”. The aim was to prevent the misuse of excess liquidity by brokers.
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Under the new standards, the entire industry must settle quarterly or monthly on a specific date, which is the first Friday of each quarter or the first Friday of each month. If the first Friday is a holiday, this settlement will take place on the previous trading day.
As a result, the funds current account should be settled on October 7; January 6, 2023; April 6, 2023, and so on, for all customers who have opted for quarterly settlement. Customer current accounts will only be considered settled by making an actual payment to their bank accounts and not by making journal entries. Customers must be notified by SMS and e-mail.
“Sebi found that many brokers were not settling client accounts on time or the process to do so had become cumbersome. The new standards are intended to bring consistency and ensure that the entire industry has a single day to work on the settlement process,” said a broker on condition of anonymity.
The move, however, may have industry-wide ramifications.
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On October 7, every broker in the country, regardless of what happened before, will have to settle the cash balances of all customers on the same day. This is a break from the previous practice of rolling settlement, which ensured that excess funds were available in the system on any given day despite various settlement obligations.
“The entire industry will suddenly lose a large amount of cash balance amounting to thousands of crores on the same day,” the broker quoted above said. “Regular traders can bring back part of the money in the next few days after settlement. Others may take several days or not return at all. Market volumes can be severely affected, at least for a few trading days after the settlement date.
Brokers generally keep excess cash collected from clients as fixed deposits with clearing houses and serve as margin.
“This will cause a stress test for brokers,” said Ashish Rathi, head of risk and compliance at HDFC Securities. “If brokers have to pay all clients on the evening of a single day, they will have to break all FDs and return them to clients according to the client’s obligation. This can lead to a liquidity crunch, as the full amount that has been spent may not return in the next few days due to factors such as banking transaction limits.
He added that brokers who do not have adequate funding capabilities will bear the brunt of the new standards.
Industry bodies have reached out to Sebi to voice some of those concerns, people with knowledge said, and hope the regulator will issue a clarification soon. An email sent to Sebi received no response.
By 2021, Sebi had conducted extensive consultations with exchanges and industry representatives to design a framework to mitigate the risk of misuse of client funds. “The intention of the online system is to discourage trading members from retaining excess client funds after current account settlement, taking into account all client obligations on the exchanges. The responsibility for monitoring the compliance settlement of members’ current accounts may be shared between exchanges,” the 2021 circular had said.