Markets regulator Sebi will soon introduce fund-blocking facility for secondary market transactions like that being done for initial public offers (IPOs) in a bid to safeguard investors’ funds from misuse or brokers’ default and consequent risk to their capital. For now, the said facility will be optional for investors as well as stock brokers.
With this facility, investors would continue to earn interest on blocked funds in savings account till the time amount is debited. It would lead to direct settlement with Clearing Corporation (CC), without passing through pool accounts of the intermediaries, thereby providing client level settlement visibility to CC and thus avoiding the risk of co-mingling of clients’ funds and securities, Sebi said.
Such an introduction would eliminate custody risk of investor collateral, which is presently retained by the members and not transferred to CC. It would be hassle-free. It would lead to immediate unblocking of client’s funds and/or return/release of securities in case of member default, Sebi noted.
“Under the proposed framework stock brokers will be allowed to either directly settle the brokerage with the UPI clients or opt for CC’s facility to deduct standard rate of brokerage from the UPI block of the clients. The framework would be implemented in a phased manner to facilitate smooth transition in the market,” Sebi said.
To recall, a Sebi consultation paper in January cited significant developments in the payment mechanisms and suggested that that the RBI approved Unified Payments Interface(UPI) Mandate service of single block and multiple debits be integrated with the secondary markets to provide a block mechanism (similar to pledge-like mechanism in securities).
With this, clients would 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 consultation paper read.