SEBI proposes changes to improve liquidity in client unpaid securities
What's the story
The Securities and Exchange Board of India (SEBI) has proposed amendments to its regulations on how brokers handle clients' unpaid securities. The changes are aimed at reducing operational friction, and improving market liquidity. They pertain to the Client Unpaid Securities Pledgee Account (CUSPA) framework, which governs securities bought by clients but not fully paid for.
Regulation adjustments
Funding window for clients
SEBI has clarified the funding window for clients, suggesting that brokers can impose a shorter payment deadline as per their internal policies. The current framework allows up to five trading days for payment. The regulator also proposed time-bound norms for releasing pledges on unpaid securities. If a client clears dues before 5:00pm the pledge must be released on the same day; otherwise by next trading day.
Reassessment proposal
Daily reassessment of pledged securities
SEBI has also proposed a daily reassessment of pledged securities, allowing partial release wherever excess collateral exists or clients make part payments. In exceptional cases where unpaid pledged securities can't be liquidated within five trading days due to reasons beyond control, the TM/CM may request depositories to extend the pledge by up to one additional calendar week. Further extensions may be allowed if such conditions persist.
Compliance easing
Simplifying compliance for brokers
The proposed changes by SEBI are aimed at simplifying compliance for brokers while reducing ambiguity for investors. The regulator has clarified that brokers may require payment within a shorter period, as per their disclosed internal policies. This is to clear the misconception that clients have a blanket five trading day window post pay-out to make payments.
Predictability enhancement
Clear timeline for pledge release
To enhance predictability, SEBI has proposed a clear timeline for the release of pledges. If a client fulfills payment obligations before 5:00pm the pledge must be released on the same day; payments after this cut-off will result in release by 5:00pm on next trading day. The draft also introduces explicit provisions for partial release of pledged securities, which were missing earlier.
Clarity improvement
Proposed changes to enhance efficiency
The regulator has also proposed to remove ambiguity in auto-release provisions. If the pledge is neither invoked nor released within five trading days from pay-out, depositories will automatically release the pledge at the end of sixth trading day. In cases where broking members and clearing members are separate entities, SEBI has proposed that unpaid securities be repledged to clearing member's CUSPA account if broking member hasn't met fund obligations.