SEBI’s new rule on collateral management and reporting is pushing some of the larger stock exchange clearing members (CM), including those operated by big banks and brokerages, to either shut or scale down their business. The new rule was rolled out following a huge default and alleged fraud by leading retail stock broker Karvy.

Stock market trading requires cash margin or liquid collateral and CMs undertake to cover the risk of any shortfall on trades worth billions of dollars daily. Karvy had used its client collateral shares to get bank loans. Since there was no segregation of such collaterals, nobody knew whom the shares belonged to.

SEBI has asked the CMs to disaggregate and report collaterals including shares and cash margin based on the end client, instead of the current practice of reporting broker-wise margin limits.

More accountability

While it may stop a Karvy-like fraud, CMs believe the rule increases their headache. Earlier, the CMs could hold brokers accountable for any wrongdoing or misreporting of collateral. But now, since the CM has to report client-wise collateral to exchanges, any discrepancy makes them directly responsible on behalf of the end trader This increases the risk, and by extension, due diligence manifold.

BusinessLine is in possession of letters from banks and brokers announcing a rollback of their clearing business. Clearing is mainly computing obligations of all traders and determining positions to settle. It involves risk management of position limits and its monitoring based on upfront deposits and margins for each broker.

“We are scaling down our clearing business since it is less viable commercially due to the changing market dynamics. We keep evaluating our businesses to check commercial viability. Whenever there are changes in regulatory rules, as an immediate reaction, there is confusion over its implementation. But you may have seen that when the dust settles, it has always benefited the markets. We are still going to be CM for our own company and a few of our other clients,” said Vineet Bhatnagar of Philip India.

Higher costs

Experts say SEBI’s rule is more damaging for banks since they have several high networth traders and foreign portfolio investors. SEBI has postponed the implementation of most clauses of its circular on desegregation of collaterals to February 28, 2022 against the earlier date of December 1 this year.

Experts say that a fall in the number of CMs could increase risk in the system since it will lead to concentration of clearing and settlement of trade with few players.