Banks usually provide stock exchanges with bank guarantees for security deposits and margin requirements on behalf of stockholders. These guarantees are submitted to clearing corporations, who then decide the trading limits for the brokers. However, brokers often pledge their clients’ funds with banks, which in turn issue BGs for higher amounts.
According to a circular issued by Sebi, no new BGs may be created using clients’ funds from May 1, 2023.
Sebi’s concern
Some brokers reportedly obtain bank guarantees worth twice the amount of fixed deposits they have made with clients’ funds, resulting in a big discrepancy between their true net worth and the guarantees they use for trading.
In addition, Sebi has directed brokers to terminate any existing bank guarantees created with clients’ funds by September 30, 2023.
The Reserve Bank of India (RBI) and Sebi have been monitoring the collateral system closely due to the potential systemic risks this practice may present. The new regulation aims to lessen these risks and guarantee that investors’ funds are better protected.
This circular would only be of academic interest for brokers who have already complied with the recent implementations of Segregated Margin Reporting and online client-wise or segment-wise allocation of client collaterals.
Brokers must ensure that this new framework does not impact their own funds. To ensure that everyone plays by the rules, Sebi will keep an eye out for any infractions of this circular, report them, and ensure that brokers adhere to the rules within the stipulated time frame.