Sebi proposes blocking of funds facility for trading in secondary market
New Delhi, January 17, 2023
Capital markets regulator SEBI on Tuesday proposed to introduce a blocking of funds facility for trading in secondary markets, a move aimed at safeguarding investors' money from misuse and default by stock brokers.
This is similar to Application Supported by Blocked Amount (ASBA)-like facility already available for the primary market which ensures that money from an investor gets moved only when an allotment happens.
In its consultation paper, SEBI said the proposed introduction of a blocking of funds facility for trading in secondary markets would allow investors to trade in secondary markets based on blocked funds in one’s bank account, thereby eliminating the need to transfer funds to stock broker.
Also, the facility would provide client level settlement visibility (both pay-in and pay-out) to clearing corporations (CC) by direct settlement of funds and securities between client or investor and CC.
The process safeguards clients’ assets from misuse, brokers’ default and consequent risk to their capital.
Under the existing framework, clients' assets pass through stock broker and clearing member before reaching CC. Similarly, the pay-out released by CC follows a similar cycle of passing through clearing members and stock brokers before reaching the client.
While CCs provide final settlement instructions to their members each day, it is the stock broker who settles obligations with clients.
The Securities and Exchange Board of India (Sebi) has sought comments from the public till February 16 on the proposal.
The markets regulator has suggested that Unified Payments Interface (UPI) Mandate service of single block and multiple debits can be integrated with the secondary markets to provide a block mechanism (similar to pledge-like mechanism in securities) whereby the clients will be able to block funds in their bank account for trading in secondary market, instead of transferring them upfront to the trading member, thereby providing enhanced protection of cash collateral.
Under the proposed model, funds would remain in the account of client but will be blocked in favour of CC till the expiry date of the block mandate or till the block is released by the CC, whichever is earlier. CC can debit funds from client account, limited to the amount specified in the block.
Further, while a UPI block upon creation would be considered towards collateral, the same would also be available for settlement purposes. For the clients who prefer to block lump sum amount, their block can be debited multiple times, subject to available balance, for settlement obligations across days.
"This comes with a dual advantage, whereby firstly it eliminates the need to transfer funds to the brokers and secondly, the funds blocked from savings accounts earn interest for the investor," Sebi said.
Effectively, the amount which earlier used to get transferred to the stock broker for trading in secondary market will remain in investors’ bank account and can now earn interest for the investor, it added.
With regard to handling of collection of brokerage from clients opting for UPI block facility, it has been suggested that the brokerage should be kept outside the proposed UPI framework and carried out bilaterally between the client and the stock broker.
Alternatively, CCs should deduct standard rate of brokerage from the UPI block for all clients of a stock broker along with settlement dues and pass it to the stock broker. Such rate of brokerage can be decided by the stock broker but should be fixed at least for a quarter.