Since earnings from unutilised money of clients comprise a significant part of the income of many brokers, there has been a disquiet among intermediaries ever since the market regulator proposed that everyday brokers and clearing members would have to transfer surplus investor funds to clearing corporations.
There were fears in the market that deprived of the income from the fund float, brokerages charged by trading members or brokers could rise. Brokers, clearing corporations and others have voiced their reservations about the proposal to the Securities and Exchange Board of India (Sebi).
Clearing Houses Flag Risks
“One of the suggestions being explored is that brokers pledge the low-risk overnight instruments bought with the unused money with the clearing members, which in turn repledge the securities or units with the clearing corporation. The pledge can be released following an electronic request to the clearing corporation. In such an arrangement, while brokers would gain from the investments in liquid, overnight securities, they cannot access or misuse the unused investor money,” a person familiar with the discussions told ET.
Such an arrangement exists for securities with the depository system, and it should be possible to replicate it for funds, said another source. “The expectation is if brokers can earn out of the surplus, there may not be a reason to complain,” said the person.
Given the Sebi’s stand and a string of measures in recent times to safeguard investor security and funds, it has become imperative for the regulator to find a solution that would address its concerns as well as allay apprehensions of the market intermediaries.
“In its current form, the proposal would have a huge impact once cash goes out of the broker’s balance sheet. Most broking firms will have to change their business model since many large ones have substantial float income,” said Gurpreet Sidana, chief operating officer, Religare Broking. “It’s a good move from the point of view of clients’ funds. But, upstreaming all funds to clearing corporations will hurt other income of broking firms. We will have to figure out how to maintain our revenue growth,” said Prabhakar Tiwari, chief growth officer, Angel One.
In fact, besides brokers, clearing house officials have also expressed their views about the possible risk they could be exposed to in managing such huge funds. “Even a small default can hurt a clearing corporation,” said a market source. According to the Sebi consultation paper, as much as ₹46,000 crore of investor funds were held with brokers and clearing members as on January 6.
A clearing corporation acts as an intermediary between a broker (taking orders from traders and investors to buy or sell securities) and a stock exchange (providing the platform where trades happen). By taking all counterparty risks on behalf of exchanges, a clearing corporation has been at the heart of the clearing and settlement system ever since Sebi restricted exchanges only for trading purposes.
