The Securities and Exchange Board of India has amended the stock broker master circular provisions on handling clients' unpaid securities. For trades not covered by the margin trading facility, unpaid securities must now be credited directly to the client's demat account and then auto-pledged, without client instruction, in favor of a separate client unpaid securities pledgee account opened by the trading member. The changes recast how brokers secure, monitor and liquidate unpaid securities in light of direct securities pay-outs to clients and changed market practices. Trading members must maintain and communicate a policy covering the invocation or release of pledges and the liquidation of unpaid securities, including a payment deadline that cannot exceed five trading days from the pay-out date. Unpaid securities pledged to the broker's pledgee account may be considered for reporting client margin collection to the clearing corporation, but cannot be used to provide exposure to the client. Brokers must assess daily the maximum value that may remain pledged and release any excess by the next trading day under exchange guidelines. If a client does not meet the payment obligation in time, the broker may invoke the pledge and liquidate the securities after giving reasonable notice. On invocation, the securities will be blocked for early pay-in in the client's demat account, sold in the market using the client's Unique Client Code, and any surplus after settling the obligation must be credited to the client's ledger. Depositories must automatically release a pledge that is neither invoked nor released within five trading days after pay-out at the end of the sixth trading day, and securities pledged to the broker's unpaid securities account cannot be further pledged or transferred to banks or nonbank financial companies to raise funds. In exceptional cases, including lower circuit conditions with only sellers, trading suspensions or other market infrastructure institution recognized circumstances beyond the trading member's control, brokers may seek extensions of up to one additional calendar week at a time and must notify clients of each extension. Stock exchanges must issue operational guidelines, in consultation with depositories, within 30 days of the circular. The amended provisions on payout, pledge, release, invocation and onward pledge restrictions take effect three months after the exchanges issue those guidelines, while the extension framework for exceptional circumstances takes effect six months from issuance of the circular.

Original source Back to tracker