Collateral Deposited by Clients — Record-Keeping Standards Brokers Must Maintain

SEBI requires brokers to maintain proper records of client collateral and issue daily statements of collateral utilisation to clients. In continuation of earlier circulars and in order to reiterate the need for brokers to maintain proper records of client collateral and to prevent misuse of client collateral, SEBI issued detailed guidelines. This article explains the record-keeping standards, the contents of the daily statement, and the consequences of misuse.

The Regulatory Basis

SEBI Circular MRD/DoP/SE/Cir-11/2008 dated April 17, 2008 specified the norms for collateral deposited by clients with brokers. The circular reiterated the need for brokers to maintain proper records of client collateral and to prevent misuse of client collateral.

Key Requirements

1. Adequate Systems and Procedures

Brokers should have adequate systems and procedures in place to ensure that client collateral is not used for any purposes other than meeting the respective client's margin requirements / pay-ins. Brokers should also maintain records to ensure proper audit trail of use of client collateral.

2. Records to Be Maintained

Brokers should further be able to produce the following records during inspection:

• Receipt of collateral from client and acknowledgement issued to client on receipt of collateral.
• Client authorization for deposit of collateral with the exchange / clearing corporation / clearing house towards margin.
• Record of deposit of collateral with exchange / clearing corporation / clearing house.
• Record of return of collateral to client.
• Credit of corporate action benefits to clients.

3. Periodic Reconciliation

The records should be periodically reconciled with the actual collateral deposited with the broker.

4. Daily Statement of Collateral Utilisation

Brokers should issue a daily statement of collateral utilization to clients which shall include, inter-alia:

• Details of collateral deposited.
• Collateral utilised.
• Collateral status (available balance / due from client).
• Break up in terms of cash, Fixed Deposit Receipts (FDRs), Bank Guarantee and securities.

Content of Daily Statement

The daily statement of collateral utilisation must provide clients with a clear picture of their collateral position, including:

| Component | Description | Collateral Deposited | Total collateral provided by the client | Collateral Utilised | Amount of collateral used for margin or other purposes | Available Balance | Collateral not currently utilised | Due from Client | Additional collateral required | Break-up | Cash, FDRs, Bank Guarantee, Securities

Consequences of Misuse

1. Complaints

In case of complaints against brokers related to misuse of collateral deposited by clients, exchanges should look into the allegations, conduct inspection of broker if required and based on its findings take necessary action.

2. Penalties

In case client collateral is found to be mis-utilised, the broker would attract appropriate deterrent penalty for violation of norms provided under:

• Securities Contract Regulation Act.
• SEBI Act.
• SEBI Regulations and circulars.
• Exchange Byelaws, Rules, Regulations and circulars.

Recent Developments

SEBI has introduced stricter norms for handling client collateral, including:

• Segregation and Monitoring at Client Level. A framework requiring TMs/CMs to report disaggregated collateral information up to the client level.

• Web Portal. Stock exchanges provide a web portal for clients to view disaggregated collateral reporting by their broker.

• Daily Monitoring. Members are required to report disaggregated segment-wise collateral data across all clients on a daily basis.

How We Help

At Anuj Desai & Associates, we help stock brokers establish proper record-keeping systems for client collateral, prepare daily statements, and ensure compliance with SEBI's requirements. If you need assistance with collateral compliance, reach out to our regulatory compliance desk.