Market regulator Securities and Exchange Board of India (SEBI) has developed an in-house system to track and raise alert over movement of client securities collected as collateral by brokers.
In a release, the regulator says, “SEBI has developed the in-house capabilities to track, online, the movement of client securities collected by the broker as collateral and raise alerts with exchanges if diversion of clients’ securities is noticed”.
In the recent past years, SEBI says it has observed that some brokers have misused clients' securities received as collateral to meet their own settlement obligation or obligations of other clients. Some brokers have also misused clients' securities by pledging them with the banks and non-banking finance companies (NBFCs) to raise funds for their own use.
"Though the Depositories Act provides for acceptance of client securities as collateral by way of pledge, the collateral of securities is accepted by way of title transfer of securities by brokers. The client providing collateral in the form of securities needs to transfer his securities in the name of the broker and once the securities move out of the demat account of the client, it is not possible for him to keep a track of use or misuse of those securities by the broker," SEBI says.
SEBI says it collects the details of the clients' securities submitted in weekly report filed by brokers with the exchanges and updates the same with trades conducted in the accounts of said clients using the data available with SEBI in data warehouse & business intelligence system (DWBIS) as well as data provided by exchanges, clearing corporations and depositories pertaining to auction trades, corporate actions, stock lending & borrowing mechanism (SLBM) transfers, and off market trades.
"The securities holding balance computed is matched with the actual clients' securities holding in the demat account and submission made by the broker for the next day. Any mismatch in data is flagged as an alert for exchanges," the market regulator says.
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