Sebi extends deadline until February 28 on segregation, monitoring of guarantees at customer level

Market regulator Sebi on Tuesday extended the deadline until February 28 to comply with certain frameworks related to segregation and monitoring of guarantees at the customer level. Previously, the deadline was December 1. The Securities and Exchange Board of India (Sebi) in July issued guidelines for client-level collateral segregation and oversight in the event of misuse of client collateral by trading members.

The move came in the wake of the Karvy Stock Broking crisis, where clients’ shares were illegally pledged as collateral for a loan.

Based on representations received from stakeholders, it was decided that a certain framework will come into effect from February 28, 2022, instead of December 1, 2021, Sebi said in a circular. The guidelines relating to the deposit and allocation of collateral, valuation of collateral, change of allocation, freezing of margin, withdrawal of collateral and the process for handling defaults will come into effect from new deadline.

In July, Sebi said that in the event of a securities guarantee provided to CC through a margin pledge or re-pledging in the depository system, the clearing house (CC) has visibility into the client to whom these securities belong and is therefore in a position to transfer the value of the collateral for the securities, on the basis of the applicable discount, on the account of this client.
Likewise, for other forms of collateral placed with the CC, the CCs will provide the CMs with an initial allocation facility by segment of the collateral to a MT / client or to the CM’s own account.

CCs will use this collateral allocation information to ensure that collateral allocated to a customer is used only for that customer’s margin obligation. In addition, some provisions put in place by the regulator in July regarding the reporting mechanism and the web portal entered into force on October 1.

The regulator had asked clearing houses to specify a reporting mechanism that will provide visibility into collateral per client, covering both cash and other cash, at broker and clearinghouse level. The reporting structure should include information disaggregated both by segment and by asset type for each customer warranty.

Sebi had said the web portal should be provided by exchanges to allow clients to view collateral reports disaggregated by brokers. Customer collateral segregation refers to procedures that identify and protect customer guarantees against abuse by a trading or clearing member and protection against default by that member or other clients.

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