Market regulator SEBI has brought in new regulations regarding the running account settlement of investors/traders, with effect from October 1, 2022. As per the new rules, the broker must credit back the unused funds in the trading account back to the investor/trader on the first Friday of every quarter or the month as opted by the client. In the old system, such account settlement (AS) occurred across the quarter. The new system will increase safety for funds belonging to investors/traders, though some brokers apprehend that higher working capital requirements may lead to a rise in brokerage fees. Here is a closer look. 

Running account settlement 

Running account is the system where the trader/investor allows the broker to retain additional funds in their trading account. This is basically done with a view to avoid the hassle of adding the funds every time to carry out a transaction. The SEBI circular stated that these rules are being enforced “to mitigate the risk of misuse of client’s funds”. This seems to be in the wake of the Karvy case where the firm pledged its customers’ securities and raised funds for its own. 

While the running account settlement is not a new concept, earlier the process was not standardised. The new provisions state that the broker now needs to settle the running account of all its clients on the first Friday of the quarter or first Friday of every month as per the client mandate. The SEBI circular also states that in case Friday is a trading holiday then this exercise must be done on the previous trading day. However,, brokers can make settlement after retaining the margin and EOD requirements of the day. Since this provision came into force from October 1, 2022, the first settlement date was October 7, 2022, and next will be January 6, 2023, then April 7, 2023, and so on. 

Actual credit in bank account

According to the SEBI circular, the settlement will be considered complete only on the actual credit in customer’s bank account. Mere journal entries in the books of broker will not be sufficient. The circular also states that in case the electronic payment fails, and the broker issues a physical instrument (e.g., cheque or demand draft.) then the realisation of that instrument will be considered as settlement and not the date of issue.  

If the investor has a running account balance and there has been no transactions made by the investor in last 30 calendar days, then funds must be returned to the investor within next three working days irrespective of when the last settlement was made. 

Effect on margins 

The new provisions specify the margin to be held back on Friday before the settlement. The circular states that the broker can retain 225 per cent of the margin requirement in all the segments across exchanges (excluding MTM and pay-in obligation).

Let’s illustrate this with an example: Rishi, an investor, decided to place a margin trade on the settlement Friday and the pay-in made by him is ₹ 1.10 lakh and the margin required is ₹1 lakh. His total fund balance is ₹3 lakh and he has also pledged securities worth ₹2 lakh. In this case the broker can retain 225 per cent of ₹1 lakh margin requirement i.e., ₹2.25 lakh in addition to the pay-in amount of ₹1.10 lakh in this case. Therefore, the excess amount held by broker here would be calculated as: the maximum margin that can be held back (225 per cent of required margin) i.e. ₹2.25 lakh and the pay-in amount i.e. ₹1.10 lakh minus securities pledged i.e. ₹2 lakh and the available fund balance i.e. ₹3 lakh. This comes to ₹1.65 lakh, which will be the amount the broker will have to transfer back to Rishi. 

Spotlight on brokerage

This is a major step taken by the regulator towards the safety of investors/traders. These provisions place checks and balance so that their funds cannot be misused, and reconciliation is also easy because of fixed day(s) of settlement. This process is also expected to bring more transparency in the process of brokers.  

However, since large payouts might have to be made on a particular day there might be some operational difficulties e.g., accurate calculations of how much payout to be made to each trader, high traffic in banking servers, payment gateways, etc. In addition, the need for working capital for the brokers may also rise. There might be some hike in brokerage rates, down the line, which might be detrimental to the interest of the investors. 

comment COMMENT NOW