Sebi releases framework to prevent misuse of client securities by brokers

Capital markets regulator Sebi on Monday introduced a new framework that will prevent the misuse of clients’ securities and funds by their securities brokers.

Under this framework, custodians must validate the transfer instruction for payment of securities from client demat accounts to trading member pool accounts against bonds received from clearinghouses.

This should be done before the execution of the actual transfer of securities for payment from the client demat account to the trading member(TM) pool account, the Securities and Exchange Board of India (Sebi) said in a circular.

The framework, applicable from 25 November, aims to further mitigate risk to client securities, particularly those given under delivery/settlement obligations.

“Custodians, before executing the actual transfer of securities for payment from the demat client account to the TM Pool account, must validate the transfer instruction received through one of the channels available for payment purposes, i.e. say initiated by the customers themselves or by the Power of Attorney (POA) / Demat Debit and Pledge Instruction (DDPI) holder against the net delivery obligation for the customer received from the CCs,” Sebi said.

For prepayment transactions, the existing lock-up mechanism facility will be maintained.

As part of the securities payment, the shares that the client wishes to unload are withdrawn from his demat account and transferred to the broker’s account and all these shares are then delivered to the clearing company (CC).

In the case of redemption of securities, the shares that the client wishes to buy are received from the clearing house and then transferred to the broker’s account. This is reflected in the customer’s demat account.

In order to validate payment instructions, a process must be put in place by the custodians.

As part of this process, custodians receive the debit instruction for remittance, given either by the client himself using the custodian’s online system or an eDIS mandate, or through of the depositary participant on the basis of a physical DIS (delivery note) or a digitally signed DIS given by customer or POA.

Clearing houses (CCs) will have to provide net delivery obligations per customer on T-day to depositories.

Based on the bond data provided by the CCs, custodians will need to validate the custodian transfer instruction details with the CC bond details based on trade member ID, quantity, payment details, etc.

If all details match, the instruction will be executed by the custodians and such securities will be debited from the client’s demat account and credited to the linked TM pool account no later than the settlement day. In the event of any discrepancies, such transfer instructions will be rejected by the Custodians.

The market regulator has issued several frameworks to protect clients’ funds and securities and to ensure that the securities broker separates the client’s securities or money and does not use them for himself or another client .

(Only the title and image of this report may have been edited by Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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