Markets

Brokers hit hard as NSE Clearing blocks trading by IL&FS Securities

PALAK SHAH Mumbai | Updated on July 26, 2019

Derivative fraud by Allied Financials results in chaos

The ₹380-crore derivative fraud by Allied Financials is now turning into a major issue for IL&FS Securities. On Thursday, NSE Clearing Corporation (NCC) disabled IL&FS Securities as a clearing member following its inability to make good a few crore worth of pay-in obligations, sources involved in the negotiations told BusinessLine.

This resulted in chaos among stock brokers empanelled with IL&FS Securities as all their trading terminals were put in square-off mode, the sources said. This means they can trade only for unwinding of existing position, and not engage in new trade.

Experts observed that the situation at IL&FS Securities is precarious as brokers and clients are seeking a return of their deposits given as collateral and NCC is routinely pressing the clearing member to make good payment obligations on existing positions.

Use of collateral

IL&FS Securities landed in a soup after it came to light that Allied Financial, which was trading through it, had used up client collateral as its own on proprietary trades. Allied lost on its trade but the payment obligation has reached the courts. Other client deposits lying with IL&FS Securities as collateral are now stuck at NCC, which wants to be on the safer side if the court decides against Allied and does not allow its funds to be used for payment. In that case, NCC will ensure that IL&FS Securities, as the clearing member, is held responsible, experts said.

“There are 21 broker members who have complained to us against IL&FS Securities for blocking their funds and not giving them no-objection certificates (NOC) to shift their businesses else where,” said Vijay Bhushan, President, Association of National Exchanges Members of India. “Thursday was chaotic as many members said their terminals were on square off mode.”

Brokers say there could be further issues if IL&FS Securities is not able to match its pay-in next week, too. It is not giving an NOC to brokers to shift as it would then have to settle their accounts by returning the collateral money, which it can’t do currently as the cash and other assets are stuck at NCC, sources said. While some large brokers have managed to extract an NOC and shift their business elsewhere, 40-50 small and mid-sized brokers are still stuck with IL&FS, sources said.

Interoperability option

“Interoperability between clearing corporations can prevent such chaos as clients can trade with multiple clearing corporations (CCs). Such an option is now available,” said Kunal Sanghvi, CFO, Metropolitan Stock Exchange.

BusinessLine had reported on July 15 that currently there is no system in place for CCs to distinguish between the assets of brokers and client collateral, which had caused the IL&FS fiasco. CCs can’t touch client collateral when a broker or clearing member fails, experts say. IL&FS and the NSE did not respond to e-mail queries.

Published on July 25, 2019

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