Brokers on edge as Sebi account settlement deadline looms

The Securities and Exchange Board of India (Sebi) diktat on running account settlement is expected to result in outflows of thousands of crores in cash balances of brokers on October 7, impacting trading volumes the next few days and the broking business.

According to earlier regulations, brokers had to settle the client’s unused funds lying in the trading accounts at least once in 90 days (every quarter) or 30 days. This was on a rolling settlement basis and referred to as ‘running account settlement’ or ‘quarterly settlement of funds’. The aim was to prevent misuse of excess cash by brokers.

Under the new norms, the entire industry has to do the quarterly or monthly settlement on a specific date, which is the first Friday of each quarter or the first Friday of every month. If the first Friday is a trading holiday, such settlement will happen on the previous trading day.

Accordingly, the running account of funds are slated to be settled on October 7; January 6, 2023; April 6, 2023, and so on, for all the clients who have opted for quarterly settlement. Clients’ running accounts will be considered settled only by making actual payment into their bank accounts and not by making any journal entries. Clients are to be intimated by SMS and email.

“Sebi had found that a lot of brokers were not settling clients’ accounts on time or that the process to do so had become cumbersome. The new norms are aimed at bringing uniformity and ensuring that the entire industry has one single day to work towards the settlement process,” a broker said on condition of anonymity.

The move, however, may have industry-wide ramifications. 

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On October 7, every broker in the country, irrespective of what has happened before, will have to settle cash balances of all clients on the same day. This is a departure from the earlier practice of a rolling settlement, which ensured that surplus funds were available in the system on any given day despite the sundry settlement obligations.

“The entire industry will suddenly lose a large amount of cash balance running into thousands of crores on the same day,” said the broker quoted above. “Regular traders may bring back some of the cash in the next few days post settlement. Others may take several days or not come back at all. The market volumes may get severely impacted, at least for a few trading days after the settlement date.”

Brokers typically keep the excess cash collected from customers as fixed deposits with clearing corporations and that serves as margin money.

“This will result in a stress test for brokers,” said Ashish Rathi, head of risk and compliance at HDFC Securities. “If brokers have to pay all customers in the evening of a single day, they will have to break all the FDs and give it back to customers depending on customer obligation. This may lead to a liquidity crunch as the entire amount that has gone out may not come back in the next few days because of factors such as limits on banking transactions.”

He added that brokers who don’t have adequate funding capabilities will bear the brunt of the new norms.

Industry bodies have reached out to Sebi to express some of these concerns, said people in the know, and are hopeful that the regulator will issue a clarification soon. An email sent to Sebi did not get a response.

In 2021, Sebi had held extensive consultations with stock exchanges and industry representatives to devise a framework to mitigate the risk of misuse of client’s funds. “The intent of the online system is to discourage trading members from retaining excess funds of clients after settlement of running account, by considering all the client obligations across exchanges. The responsibility of monitoring settlement of running account compliance of members may be shared among stock exchanges,” the 2021 circular had said.