In the recent past years, it has been observed that some brokers have misused clients’ securities received as collateral to meet their own settlement obligation or obligations of other clients. Some brokers have also misused clients’ securities by pledging them with the banks and NBFCs to raise funds for their own use. Though the Depositories Act provides for acceptance of client securities as collateral by way of pledge, the collateral of securities is accepted by way of title transfer of securities by brokers. The client providing collateral in the form of securities needs to transfer his securities in the name of the broker and once the securities move out of the demat account of the client, it is not possible for him to keep a track of use/ misuse of those securities by the broker.
A few brokers have been declared defaulter by the Exchange not on account of failure to meet settlement obligation but in failing to meet liabilities/ dues to the clients. The available assets of the broker were found short to meet the clients’ funds and securities obligations. In order to prevent the misuse of clients’ securities by broker, SEBI has taken a number of policy measures including laying down early warning mechanism to detect diversion of clients’ funds and securities, restricting broker to pledge clients’ securities even with the consent of the client, securities to be transferred to Client account or Client Unpaid Securities Account (CUSA) within 24 hours of payout, mapping of Unique Client Code with demat account of the client to detect diversion of payout of securities. SEBI has also directed Clearing Corporations to share client level pay-in and pay-out obligations with Depositories, and Depositories are required to check the corresponding debit or credit in the demat account of client and report mismatches to the Exchanges. This has detected the diversion of clients’ securities received in payout.
SEBI has developed an in – house online system by which it would be able to prepare client level securities holding register of the brokers. SEBI collects the details of the clients’ securities submitted in weekly report filed by brokers with the Exchanges and updates the same with trades conducted in the accounts of said clients using the data available with SEBI in DWBIS as well as data provided by Exchanges, Clearing Corporations and Depositories pertaining to auction trades, corporate actions, SLBM transfers, off market trades etc. The securities holding balance computed is matched with the actual clients’ securities holding in the demat account and submission made by the broker for the next day. Any mismatch in data is flagged as an alert for Exchanges.
As such, SEBI has developed the in – house capabilities to online track the movement of client securities collected by broker as collateral and raise alerts with Exchanges if diversion of clients’ securities is noticed. These reports are being generated by SEBI on a weekly basis and three such mismatch reports have already been forwarded to Exchanges for reconciliation with members. This system is likely to timely detect the misuse of clients’ securities collected by brokers as collateral or received in pay-out of securities.
