NSE Frames Norms To Act Against Brokers Misusing Of Client Funds
The National Stock Exchange (NSE) has recently announced a new framework for taking immediate actions against trading members who misuse client funds. This move comes after the exchange observed instances of misuse of client funds during its inspections and alerts generated under offsite supervision.
What are the new norms?
According to a circular issued by the NSE on June 14, 2023, the exchange will block the proprietary deposits of the trading member available with the clearing house, NSE Clearing Ltd (NCL), to the extent of the misuse amount or Rs 10 crore, whichever is lower, in case of misuse of client funds. The action will be taken for violating “principles of enhanced supervision” for stock brokers in case of misuse of clients funds.
The principles of enhanced supervision are a set of guidelines issued by SEBI in 2016 to ensure better protection of client assets and prevent misappropriation by brokers. The principles include segregation of client funds and securities, reporting of client-wise collateral, settlement of running account of funds and securities, and maintenance of records and audit trails.
The NSE said that the amount equivalent to the aggregate amount of all principles will be blocked in case misuse is observed with regards to “principles of enhanced supervision” for stock brokers. The blocking of deposits will be done after two trading days from the date of communication to the trading member and will last for 10 days. Moreover, no exposure will be granted to the trading member on such deposits.
The new framework will come into force from September 1, 2023, the NSE said.
Why is this important?
The new norms are aimed at safeguarding the interests of investors and ensuring fair and transparent practices in the stock market. Misuse of client funds by brokers can lead to serious consequences such as loss of investor confidence, market manipulation, fraud, and default.
The NSE’s move is also in line with SEBI’s efforts to strengthen the regulatory framework for stock brokers and enhance investor protection. In 2019, SEBI had imposed stricter margin reporting norms for brokers to ensure that they collect adequate collateral from clients before allowing them to trade. The regulator had also mandated that brokers should settle the running account of funds and securities of clients at least once in 30 or 90 days as per the preference of the client.
The NSE’s new framework is expected to act as a deterrent for brokers who indulge in misuse of client funds and also provide a mechanism for swift action by the exchange in case of any violation.
What are the challenges?
While the new norms are welcome, they also pose some challenges for both brokers and clients. Brokers may face operational difficulties in reporting and segregating client collateral at the level of each client on a real-time basis due to technical glitches and infrastructure bottlenecks at the clearing house level. Brokers may also have to bear higher costs and risks due to blocking of their deposits.
Clients may face inconvenience and confusion due to frequent changes in margin requirements and settlement cycles. Clients may also have to provide extra margin over and above the regulatory requirement to avoid penalties or exposure limits imposed by brokers.
Therefore, it is important that both brokers and clients are aware of their rights and obligations under the new norms and comply with them diligently. It is also essential that the NSE and SEBI ensure smooth implementation and monitoring of the new framework and address any issues or grievances that may arise in a timely manner.
