Client Code Modification Rules — What Counts as a 'Genuine Error' vs a Violation
Stock exchanges may allow modifications of client codes of non-institutional trades only to rectify a genuine error in entry of client code at the time of placing / modifying the related order. This article explains the strict objective criteria, the penalty structure, the waiver provisions, and what counts as a 'genuine error' vs a violation.
The Regulatory Basis
SEBI Circular CIR/DNPD/6/2011 dated July 05, 2011 (as amended by CIR/MRD/DP/29/2014 dated October 21, 2014 and SEBI/HO/CDMRD/DMP/CIR/P/2016/73 dated August 19, 2016) prescribes the rules for modification of client codes of non-institutional trades.
The Core Principle
Stock Exchanges may allow modifications of client codes of non-institutional trades only to rectify a genuine error in entry of client code at the time of placing / modifying the related order.
Strict Objective Criteria
If a Stock Exchange wishes to allow trading members to modify client codes of non-institutional trades, it shall:
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Lay down strict objective criteria, with the approval of its Governing Board, for identification of genuine errors in client codes which may be modified, and disclose the same to market in advance.
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Set up a mechanism to monitor that the trading members modify client codes only as per the strict objective criteria.
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Ensure that modification of client codes is covered in the internal audit of trading members.
Penalty Structure
The Stock Exchanges shall levy a penalty from trading members and credit the same to its Investor Protection Fund as under:
| 'a' as % of 'b' | Penalty as % of 'a' |
|---|---|
| ≤ 5% | 1% |
| > 5% | 2% |
Where:
- a = Value (turnover) of non-institutional trades where client codes have been modified by a trading member in a segment during a month.
- b = Value (turnover) of non-institutional trades of the trading member in the segment during the month.
Special Inspection Trigger
The Stock Exchange shall conduct a special inspection of the trading member to ascertain whether the modifications of client codes are being carried on as per the strict objective criteria set by the Stock Exchange, if 'a' as % of 'b' exceeds 1% during a month.
Error Accounts
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Shifting of trades to the error account of broker would not be treated as modification of client code, provided the trades in error account are subsequently liquidated in the market and not shifted to some other code.
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Brokers shall disclose the codes of accounts which are classified as 'error accounts' to the Stock Exchanges.
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Each broker should have a well documented error policy approved by the management of the broker.
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Stock Exchanges shall periodically review the trades flowing to the error accounts of the brokers.
Waiver of Penalty
Stock exchanges may waive penalty for a client code modification where stock broker is able to produce evidence to the satisfaction of the stock exchange to establish that the modification was on account of a genuine error.
Limitation on Waiver
Not more than one such waiver per quarter may be given to a stock broker for modification in a client code.
Explanation: If penalty waiver has been given with regard to a genuine client code modification from client code AB to client code BA, no more penalty waivers shall be allowed to the stock broker in the quarter for modifications related to client codes AB and BA.
What Counts as a 'Genuine Error'
- Typographical error in entering the client code at the time of placing or modifying the order.
- Inadvertent error that can be substantiated with evidence.
- Error that is rectified promptly upon discovery.
What Counts as a Violation
- Frequent modifications in client codes.
- Modifications without genuine error.
- Modifications to circumvent position limits or other regulatory requirements.
- Proprietary trades modified as client trade and vice versa (strictly prohibited).
Prohibited Modifications
- Proprietary trades shall not be allowed to be modified as client trade and vice versa.
- Modifications that are not on account of a genuine error.
- Modifications that violate the strict objective criteria set by the stock exchange.
Reporting Requirement
Stock exchanges shall submit a report to SEBI every quarter regarding all such client code modifications where penalties have been waived.
Disciplinary Action
Stock exchanges shall undertake stringent disciplinary actions against stock brokers who undertake frequent client code modifications.
How We Help
At Anuj Desai & Associates, we help stock brokers understand the client code modification rules, implement error policies, and ensure compliance with SEBI's requirements. If you need assistance with client code modification compliance, reach out to our regulatory compliance desk.