SEBI's new rule: From May 1, stock brokers can't create bank guarantees based on clients' funds

Come May 1, 2023, stock brokers and clearing members won't be able to create bank guarantees out of clients' funds, a fresh circular issued by market regulator SEBI stated. The Securities and Exchange Board of India has asked to put a closure on all existing bank guarantees created out of clients' funds by September 30, 2023. The move aims to curb the misuse of investors' money.

"Currently, stock brokers and clearing members pledge client's funds with banks which in turn issue bank guarantees to clearing corporations for higher amounts. This implicit leverage exposes the market and especially the client's funds to risks," SEBI stated.

However, the new set of rules won't be applicable to proprietary funds of stock brokers and clearing members in any segment and stock brokers' proprietary funds deposited with clearing members in the capacity of a client.

In addition, the market watchdog has directed stock exchanges and clearing corporations to take stock of the current position of the bank guarantees issued out of clients' funds by brokers and clearing members and monitor the wind down to ensure implementation of the framework without any disruption of services to clients.

For this purpose, stock exchanges and clearing corporations have to put in place periodic reporting mechanisms for stock brokers and clearing members.

SEBI asked stock exchanges and clearing corporations to submit the name of the stockbroker, nature of the entity, total bank guarantee amount as collateral, total bank guarantee (out of client's funds) as collateral and total bank guarantee (out of proprietary funds) as collateral to it on fortnightly basis, starting June 1, 2023.

"Brokers and clearing members must be required to provide a certificate, by its statutory auditor confirming the implementation. Such a certificate must be submitted to stock exchanges and clearing corporations by October 16, 2023," Sebi mentioned.

Further, SEBI ordered exchanges and clearing corporations to verify compliance with the provisions of the circular in their periodic inspections.

Exchanges and clearing corporations must also evolve adequate mechanisms to address cases of stock brokers/clearing members who do not comply with the provisions of the circular by the stipulated dates, the regulator noted.

SEBI also directed the exchanges to bring the instructions of the circular to the notice of stock brokers and clearing members and mention the implementation status in their monthly development report.

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