MUMBAI: In a consultation paper released on Tuesday, the Securities and Exchange Board of India (Sebi) proposed to introduce a blocking of funds facility for trading in secondary markets. The move of the capital market regulator is aimed at protecting investors’ money from misuse and default by stock brokers.
The proposed facility “allows investors to trade in secondary market based on blocked funds in one’s bank account thereby eliminating the need to transfer funds to stock broker,” said the consultation paper.
“Under the proposed model funds shall remain in the account of client but will be blocked in favour of clearing corporation till the expiry date of the block mandate or till block is released by the clearing corporation, whichever is earlier. The clearing corporation can debit funds from client account, limited to the amount specified in the block,” it added. This process is similar to Application Supported by Blocked Amount (ASBA)-like facility already available for the primary market which ensures that money from an investor gets moved only when an allotment happens.
The facility would provide client level settlement visibility (both pay-in and pay-out) to clearing corporations (CC) by direct settlement of funds and securities between client or investor and CC.
Under the existing framework, clients’ assets pass through stock broker and clearing member before reaching CC. Similarly, the pay-out released by CC follows a similar cycle of passing through clearing members and stock brokers before reaching the client.
While CCs provide final settlement instructions to their members each day, it is the stock broker who settles obligations with clients.The markets regulator has suggested that Unified Payments Interface (UPI) Mandate service of single block and multiple debits can be integrated with the secondary markets to provide a block mechanism (similar to pledge-like mechanism in securities) whereby the clients will be able to block funds in their bank account for trading in secondary market, instead of transferring them upfront to the trading member, thereby providing enhanced protection of cash collateral.
The regulator has sought comments from market participants until February 16 on any operational challenges on the proposed concept, associated processes, transaction flow and risk management.