Segregation and Monitoring of Collateral at Client Level — The Reporting Framework
SEBI has introduced a framework for segregation and monitoring of collateral at the client level to protect client collateral from misuse and default. In order to further strengthen the mechanism of protection of client collateral from (i) misappropriation/ misuse by TM/ CM and (ii) default by TM/CM and/or other clients, SEBI introduced the framework. This article explains the reporting framework, the web portal facility, and the daily reporting requirements.
The Regulatory Basis
SEBI Circular SEBI/HO/MRD2_DCAP/CIR/2021/0598 dated July 20, 2021 introduced the framework for segregation and monitoring of collateral at client level. The framework aims to provide visibility of client-wise collateral at all levels — TM, CM, and Clearing Corporation.
The Reporting Framework
Reporting by TM to CM
TM shall report disaggregated information on collaterals up to the level of its clients to the CM. The report must include:
- Collateral received by TM from each client.
- Collateral retained by TM.
- Collateral placed with CM.
Reporting by CM to SE and CC
CM shall report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the Stock Exchanges (SEs) and CCs in respect of each segment.
Daily Reporting
Members are required to report disaggregated segment-wise collateral data across all clients on a daily basis. This ensures that collateral information is current and accurate.
Collateral Allocation
Segment-Wise Allocation
Members are required to report upfront segment-wise allocation of client's collateral to Clearing Corporations in their respective client's unique client code (UCC) only.
Collateral Types Covered
The reporting covers:
- Cash and cash equivalents.
- Securities (through margin pledge/re-pledge).
- Fixed Deposit Receipts (FDRs).
- Bank Guarantees.
- Government Securities.
Web Portal Facility
Stock exchanges shall provide a web portal facility to allow clients to view their disaggregated collateral placed with Member and as reported by their registered Trading Member / Clearing Member. This portal enables clients to:
- View their collateral position.
- Verify that their collateral has been properly allocated.
- Detect any misuse or misappropriation.
Information Available on Web Portal
- Collateral allocated to the client.
- Collateral retained by the TM.
- Collateral placed with CM/CC.
- Value of securities collateral provided through margin pledge/re-pledge.
NIL Reporting
Members are also additionally required to report NIL holding or Zero balance clients in the same daily collateral segregation reporting. Members are not required to upload data for clients with Zero balance/Nil holding who have not traded in last 12 months.
Blocking of Margins
Order of Blocking
On receipt of a trade from a client account by the CC, the margin shall be blocked in the following order:
- Client Collateral. First from the value of the client collateral.
- TM Proprietary Collateral. If client collateral is not sufficient, residual margin from the TM proprietary collateral.
- CM Proprietary Collateral. If TM proprietary collateral is also not sufficient, residual margin from the CM proprietary collateral.
Client With Open Positions
The re-pledge securities of other clients who did not have any open position with CC, their securities shall not be available to CC for invocation to meet settlement default of the CM.
Default Management
Default of Client of TM
In case of default by a client of TM:
- The TM shall make good the default to CM.
- CM shall be entitled to liquidate available cash, cash equivalent collateral and TM's own pledged /or re-pledged securities.
Default of CM
In case of default by the CM:
- CC shall encash the available collateral including cash, cash equivalent collateral, CM's own pledged securities.
- CC shall be entitled to directly invoke the re-pledged securities of client / TM who has any open position.
How We Help
At Anuj Desai & Associates, we help stock brokers implement the collateral segregation and monitoring framework, establish reporting systems, and ensure compliance with SEBI's requirements. If you need assistance with collateral compliance, reach out to our regulatory compliance desk.