Zerodha’s founder and chief executive officer(CEO) on Thursday said the new account settlement (AS) process would lead to upward pressure on brokerage rates over the next few years due to regulatory changes.
“Starting this October 7th, every first Friday of the month, all brokerages must transfer unused funds back to the customer’s bank account as part of the new account settlement (AS) process,” he said on Twitter.
“Until now, account settlement was spread across a quarter. The idea of doing this in one day, I guess, is another way to test if brokers are misusing client capital in any way. While these changes are good in terms of customer safety, they will lead to increased working capital requirements for the broking industry,” Kamath added.
He cited some issues that the broking industry might have to deal with as a result of new regulatory changes:
1. Operational risk of sending large amounts in one single day.
2. Much higher working capital requirement, especially on Monday after AS.
3. Hit on float income.
4. Higher working capital.
“For example, payment gateways settle funds with brokers on T+1. So if a broker allows you to trade instantly with funds transferred using a payment gateway (PG), the broker’s own capital is blocked. On the Monday after AS, more funds might be transferred to trade using PG,” he said.
“If the broker allows buying stocks with proceeds from stocks sold immediately, the broker’s own funds will be blocked until the exchange settles by T+2 days. While this isn’t directly related to AS, it will all add up,” the billionaire broker added.
In July 2022, the capital markets regulator Sebi came out with new guidelines on the settlement of running accounts of clients’ funds lying with stock brokers.
Under the rules, stock brokers need to reverse the unutilised funds lying in the clients’ trading accounts at least once within a gap of 30 or 90 days between two settlements of running accounts as per the preference of the client.
Further, for the clients, who have not done any transaction in the 30 calendar days, funds will be returned to the client within the next three working days irrespective of the date when the running account was previously settled.
Kamath said that the AS regulation is kind of unique to India. In most countries, brokers, like banks, can hold unused funds forever & also use them for working capital requirements. In India, client funds can only be used for that customer’s trades after all the regulatory changes.
He added that brokers in the US can offer 0 brokerages because they can use customer funds for working capital, earn through payment for order flow, and by lending customer securities. All this isn’t allowed in India, and rightly so.
“So if your Zerodha account balance reduces or you receive funds in your bank this Saturday, you know why,” he further added.
(With inputs from PTI)