Sebi proposes segregation and monitoring of collateral at client level

The Securities and Exchange Board of India (Sebi) has proposed segregation and monitoring of collateral at client level to ensure protection of investors’ collateral.

“In the past, there have been instances of misuse of client collateral by trading member.This becomes even more accentuated at the time of default of a trading member. In such a scenario, not only confidence of investors in market integrity is shaken, but it also brings disrepute to the entire ecosystem of trading,” Sebi said in a discussion paper on Monday.

The regulator has proposed to put in place a framework to ensure identification of each client’s collateral.

This would help ensure utilization of a client’s collateral towards the margins of that client only. Also, in case of default by a trading or clearing member such readily available collateral information will also help ensure expeditious return of collateral to each non-defaulting client after adjustment of any dues of the respective clients, Sebi said.

Under the proposed process, clients would have to provide collateral to the trading or clearing member, as the case may be.

In case of collateral provided to the trading member, it would have to retain some collateral with itself and pass on some collateral to the clearing member.

Likewise, clearing members would have to retain some collateral with themselves and pass on some collateral to the clearing corporation.

“When collateral is provided onwards, it may be in the same form or in some other form (e.g. Clearing members may receive cash but create a fixed deposit from the cash and lien mark it to the clearing corporation),” Sebi said.

The regulator has sought public comments on the proposal by June 24.