Stock brokers’ body wants old system to continue alongside pledge/repledge process

K.R.Srivats New Delhi | Updated on July 26, 2020 Published on July 26, 2020

ANMI urges finmin to allow its functioning till September 30 for smooth transition to new schedule

With less than a week to go before the SEBI-announced implementation date of August 1 for the new pledge/repledge process kicks in, stock brokers’ body ANMI has knocked on the Finance Ministry’s door, seeking changes in its implementation schedule.

The Association of National Exchanges Members of India (ANMI) has urged the Finance Ministry to allow co-existence of current title transfer collateral mechanism and proposed pledge/repledge process for two months from August 1 so as to help the broking fraternity achieve smooth transition to the well-intentioned latter system.

Caution against chaos

To prevent misuse of clients’ securities by brokers (clearing members), SEBI had earlier this year banned title transfer collateral system and proposed to replace it with a pledge/repledge process that would give complete visibility to investors about their holdings and their use. This new mechanism of pledge/repledge was to come into effect from August 1.

However, ANMI now wants both the old and the new system to co-exist for two months after which the pledge/repledge system can be implemented in toto.

The transition from the old regime to the proposed pledge/repledge process in such a hurried manner is fraught with great risks and will completely break down the day-to-day processes and operations of all market participants, leading to unimaginable chaos and total breakdown, ANMI CEO, V Raghavendra Prasad, cautioned in a letter to the Joint Secretary in the Department of Economic Affairs in the Finance Ministry.

The letter has highlighted that the Depositories are not yet completely ready with the process for implementation of pledge/repledge.

During these two months (till September 30), the shares lying with the Clearing Corporation (CC)/ Clearing Member (CM) plus the shares lying in the investor accounts where brokers hold a Power of Attorney (POA) or the shares transferred from the investors’ demat account to the broker collateral account and further given to CC/CMs and also the shares pledged to the new collateral account be treated as margin compliant, ANMI has suggested.

SEBI framework

It may be recalled that SEBI had, in February this year, devised a new framework that mitigates the risk of misappropriation or misuse of clients’ securities available with trading member (TM)/ clearing member (CM) depository participant (DP). The misappropriation or misuse would include use of one client’s securities to meet the exposure, margin or settlement obligations of another client of the TM/CM.

For the purpose of providing collateral in the form of securities as margin, a client would have to pledge securities with TM, and TM should re-pledge the same with CM, and CM in turn should re-pledge the same to Clearing Corporation. The complete trail of such re-pledge would have to be reflected in the demat account of the pledger, SEBI had said.

SEBI had stipulated that transfer of the securities to the demat account of the TM/CM for margin purposes (i.e title transfer collateral arrangements) would be prohibited. In case a client has given a power of attorney in favour of a TM/CM, such holding of power of attorney would not be considered as equivalent to the collection of margin by the TM/CM in respect of securities held in the demat account of the client, SEBI had said.

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Published on July 26, 2020
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