BSE's Sundararaman Ramamurthy Explains Pledging System's Role In Securing Investor Assets

At the Global Fintech Fest 2024, Shri Sundararaman Ramamurthy, MD & CEO of BSE Ltd., discussed the regulatory improvements that have revolutionized India’s capital markets, focusing on the pledging system. He began by explaining the risks inherent in the previous market structure, where traders faced unknown credit risks due to the anonymity of counterparties in order-matching systems. This uncertainty was mitigated by shifting credit risk to market risk, which can be managed through margin requirements. However, one major issue remained: liquidity. Traders often held assets like fixed deposits or securities instead of cash. Regulators eventually allowed securities to be used as collateral for margin requirements, but this led to another challenge—trading members had the potential to misuse client securities. In some cases, they could use a client's assets for other purposes or clients. The new pledging mechanism introduced by regulators ensures that clients no longer need to transfer their securities to brokers. Instead, a pledge is created, and only the required margin is utilized. This safeguards clients' securities and prevents misuse by brokers, addressing a significant loophole. Ramamurthy emphasized how this system protects investor interests and enhances market transparency, providing a much-needed regulatory solution.