SEBI vide its Circular dated 25th April, 2023 issued for Stock Brokers through recognized Stock Exchanges Clearing Members through recognized Clearing Corporations.
The circular states:
Stock Brokers (SBs)/Clearing Members (CMs) pledge client’s funds with Banks, which issue Bank Guarantees (BGs) to clearing corporations for higher amounts. This implicit leverage exposes the market and client’s funds to risks, so it has been decided to implement the following measures to safeguard the interests of investors:
a) Beginning May 01, 2023, no new BGs shall be created out of clients’ funds by SBs/CMs.
b) Existing BGs created out of clients’ funds shall be wound down by September 30, 2023
The provisions of this framework are not applicable to proprietary funds of SBs/CMs in any segment and SB’s proprietary funds deposited with CM in the capacity of a client.
Monitoring and reporting:
Stock exchanges and clearing corporations must take stock of the current position of BGs issued out of clients’ funds by SBs/CMs and monitor the wind down to ensure implementation of the circular without disruption of services to clients, they must put in place periodic reporting mechanisms for SBs/CMs.
Stock exchanges and clearing corporations must submit data to SEBI on a fortnightly basis starting June 01, 2021.
SBs/CMs must provide a certificate from their statutory auditor confirming the implementation of this circular by October 16, 2023 to stock exchanges/clearing corporations.
Stock exchanges and clearing corporations must verify compliance with the provisions of the circular in their periodic inspections/reporting, and develop mechanisms to address cases of SBs/CMs who do not comply by the stipulated dates.
The provisions of SEBI circulars will be modified to reflect the implementation of these measures.
The stock exchanges and clearing corporations are directed to:
a) bring the provisions of this circular to the notice of stock brokers and clearing members, as the case may be, and also disseminate the same on their websites;
b) make amendments to the relevant bye-laws, rules and regulations for the implementation of the above provisions;
c) communicate to SEBI, the status of the implementation of the provisions of this circular in their monthly development report.
Link of the circular: https://www.sebi.gov.in/legal/circulars/apr-2023/bank-guarantees-bgs-created-out-of-clients-funds_70518.html
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