InvestorQ : Can you tell me what this monthly settlement of client accounts by the brokers means under the new rules?
Dia Deshpande made post

Can you tell me what this monthly settlement of client accounts by the brokers means under the new rules?

swati Bakhda answered.
2 months ago

Incidentally, the 07ths of October was the first Friday of the month and as per the new SEBI rules, brokers had to settle all the client accounts on that day. The new rule of the Securities and Exchange Board of India (SEBI) pertaining to brokers squaring client accounts would kick in from this day. This rule stipulates that all registered brokers must square up the accounts of their clients one standard day i.e. the first Friday of the month. However, there are some very important points to understand in this context and this is relevant to all the traders and players in the equity and the derivatives segment too.

Highlights of the new system

· The current system of 3 months settlement will continue for traders who are active traders. However, in the case of traders who are inactive during an entire month and do not take any position either in cash or in the futures market, the settlement will be on a monthly basis. If that person wants to trade, they need to load margins once again.

· The second big change is on the timing of the payout. In the old system, the broker could phase the payout to different clients and just maintain a 3 month cycle. This avoided too much of payment and administrative pressure on the broking back office. However, now all have to be done on the first Friday, irrespective of whether it is monthly or once in 3 months.

· This creates a working capital issue. For instance, when brokers pay out on the first Friday of the month, the traders have to again load monies on Monday. Typically, when the funds are loaded on Monday, the credit to buy or trade is given immediately. However, the broker actually gets the funds from the bank or the payment gateway only after 1 day.

· That is where the working capital problem. In the past, the broker had a lot of idle funds, so they could afford to fund the customers at no cost. Now that is not possible and it puts a lot of pressure on the broker working capital. In short, the broker is forced to incur working capital cost and that is likely to be passed on to the customers. Most likely, there would be a gradual increase in the rates of brokerage.

· There is an issue of float. In the US, zero cost brokers like Robin Hood are actually zero cost and that is because they can have the float of the idle customers like the banks. However, in the new system, there will be limited idle float. That means, the broker sees reduced income from float funds and also sees higher working capital requirement. This may dent the edge that many low cost brokers in India had and offered to the customers.

Having said the above, customers must appreciate that this is a good move overall as it avoids the scope for misuse of funds. In this case, the broker would not be able to hold on to the funds of customers permanently and scope for cases like Karvy are reduced substantially. The only worry is brokers would have to move about Rs25,000 crore of such retail funds but banks do not see too much of a risk in this. Low cost brokers are unhappy as they lose the float but bank based brokers would be pleased since this does not impact them much as the money still stays in the same bank account.