3 weeks ago
Brokers Challenge Sebi’s Proposed Client-Balance Capital Rule
Sebi is considering a new rule about how much safety money stockbrokers must keep.
The proposed rule would look at the total money credited to clients’ accounts over six months.
It would also consider how many active clients a broker has.
Brokers say this may be unfair because most client money is sent to clearing corporations at the end of each trading day.
They say they could be asked to keep extra capital for money they do not actually possess.
Brokers have asked Sebi to base the calculation more on money they really hold.
Another proposal is to measure a broker’s size and risks, including trading activity and leverage.
Sebi has not responded to an emailed query about the objections.
Sebi has proposed calculating brokers’ variable net worth using 10% of clients’ average credit balance over six months.
The proposal would also add capital requirements based on the number of direct and authorised-person clients.
Brokers say nearly all client funds have been routed to clearing corporations since 2023, leaving them with little client cash.
They argue the proposed formula could require capital against funds they no longer hold and have asked Sebi to consider money actually retained.
EPP Securities executive director Raj Shah suggested a risk-based formula incorporating client funds, client numbers, trading volumes, leverage and services.
- Who
- The Securities and Exchange Board of India, stockbrokers and EPP Securities executive director Raj Shah.
- What
- Brokers are objecting to Sebi’s proposed changes to variable-net-worth requirements.
- Where
- The issue concerns India’s securities-market regulatory framework.
- When
- Sebi issued the consultation paper in April; the proposal was discussed at an Intermediary Advisory Committee meeting on September 11, and the upstreaming requirement has applied since 2023.
- Why
- Brokers say the proposed calculation would include client funds already routed to clearing corporations, potentially requiring capital against money they no longer hold.
Brokers’ objections
Sebi’s proposed approach
Basis for capital calculation
Brokers’ objections
Capital should be based on the client money brokers actually hold because most funds are upstreamed to clearing corporations.
Sebi’s proposed approach
The proposed framework would use average client credit balances because upstreaming has left brokers retaining minimal client cash.
Client-count requirement
Brokers’ objections
Brokers could face a higher capital burden even when client funds are no longer in their possession.
Sebi’s proposed approach
The proposal adds capital requirements according to the number of active direct and authorised-person clients.
Alternative framework
Brokers’ objections
A risk-based formula reflecting operational scale, trading activity, leverage, exposure and services would be more proportionate, according to Raj Shah.
Sebi’s proposed approach
Sebi’s consultation paper focuses on average client credit balances and active-client counts as measures of client-related obligations and scale.
Key facts
- Current calculation
- Variable net worth is currently set at 10% of the average daily cash balance retained for clients.
- Proposed calculation
- The consultation paper proposes using 10% of clients’ average credit balance over the previous six months.
- Additional direct-client capital
- Brokers with more than 10,000 and up to 50,000 direct active clients would need an additional ₹50 lakh, with another ₹50 lakh for every additional 50,000 clients or part thereof.
- Authorised-person clients
- The proposal sets requirements of ₹5 lakh for up to 2,500 active clients, ₹25 lakh for more than 2,500 up to 10,000 clients, and ₹50 lakh for every subsequent 10,000 clients or part thereof.
- Upstreaming framework
- Since 2023, brokers have been required to route nearly all client funds directly to clearing corporations by the end of each trading day.
- Brokers’ alternative
- Brokers want the calculation to consider the client money they actually retain.
- Risk-based alternative
- Raj Shah proposed considering aggregate client funds, active clients, trading volumes, leverage, exposure and services offered.
Quotes
Unnamed broker representative
A person aware of the brokers’ discussions with Sebi, speaking anonymously
“All balances with a broker are upstreamed to the clearing corporation and if 10% of the average credit balance is considered for net worth, then it would become difficult for the broker to maintain it. We have told Sebi that considering 10% of the money that the broker actually holds would be a better way to calculate net worth”
livemint.com
“Sebi's consultation paper proposes that 10% of the average credit balance be considered while calculating variable net worth. This becomes difficult for brokers as the balance is upstreamed to the clearing corporation. This issue was discussed in the Intermediary Advisory Committee (IAC) meeting on September 11”
livemint.com
Raj Shah
Executive director at EPP Securities
“A more effective approach would be to link variable net worth to the broker's operational scale and risk exposure, rather than relying only on client cash balances. This could include a combination of aggregate client funds handled, active client count, trading volumes, leverage and exposure, and the nature of services offered”
livemint.com
Sources
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