Market regulator SEBI has asked stock brokers to provide the exchanges with a status report on the implementation of new client-broker agreement, which will become effective from June 30. The deadline has been extended a couple of times, as brokers sought time to prepare for the proposed changes, and also due to ambiguity over some of the rules. SEBI had announced the guidelines in December last year.
The new rules require brokers to keep records of the people introducing new clients, and regulatory actions against them (clients), detail the systems for settling client funds and securities once a calendar quarter/month, among other things.
For existing clients, the broker has to inform the exchanges if he has obtained a signed confirmation letter for the e-mail id to which transactions details will be sent, and the necessary consents for running accounts, annual renewal, among other things.
The regulator is reviewing the rule that makes it mandatory for the broking firm to settle the funds and securities at the end of the calendar quarter/month, said a person familiar with the development.
This follows representations by brokers highlighting the difficulty in implementing this clause, especially by those those with a large client base.
“In the new format, trading in derivatives will become difficult for clients as in case of any outstanding positions at the end of the quarter/month, the client will have to square-off his positions. This is because the broker will not be left with any margins since he has to make the balance zero by issuing a cheque,” said the head of compliance of a domestic brokerage.
Every client has to keep a certain amount as margins if he has any outstanding positions in the derivatives as a protection against any adverse movement in the stock price.
According to brokers, the regulator is proposing that brokers keep a certain amount as balance estimated for the next three to five days, if the client has to meet his obligations on open positions. But that would be a difficult task to do, say brokers.
“Further, during the same period if the client wants to take any fresh positions, he would not be allowed to do so because of lack of margin,” says Praveen Malik, vice-president in charge of compliance at FCH Centrum Wealth Managers.
Brokers add that given the current banking infrastructure, this kind of huge payout of funds and bringing them back in a timely manner will be difficult.
The alleged misuse of these funds by broking firms was one of the major causes for disputes and litigation between brokers and their clients. Experts say that the new norms will significantly curb the misuse of client money by brokers.
According to brokers, SEBI is considering making trade confirmation through SMS mandatory in order to overcome the problem of unauthorised trading in clients’ account. While large brokerages follow this practice, most of the smaller brokerages do not do so.
