Why has SEBI extended the time line for client collateral segregation?

Nobody wants to bring about tough measures in the market when the markets are in a selling grip and the global situation is so uncertain. That cold be one big reason. Hence, SEBI announced extension of the timeline for implementing client segregation and monitoring by about two months. Instead of being effective from March 2022, the date of implementation has been pushed by 2 months to May 2022. They don’t want more confusion now.

The background to this circular lies in the infamous Karvy Stock Broking scam of 2019. Even prior to the Karvy case, there were numerous reported cases of brokers misusing the client collateral of the customers without informing them. This situation came to a real pass in the aftermath of the Karvy Stock broking scam wherein client shares were illegitimately pledged as collateral, transferred to group shell entities and loans raised against them.

The idea is that segregation of client collateral will protect client collateral from any misuse by trading members or clearing members. However, in terms of back-office changes and tech readiness, there is a road to traverse, which is the problem. In the new system, clients have to indicate in advance whether they wish to trade in cash, futures or options and how to allocate their collaterals to various positions at a client level. This obviates scam.

The problem arises as many traders give 100% stock collateral while clearing member had to maintain 50% margins in cash. This was not a problem when client collaterals were not segregated at a client level. Now with client level segregation, the going may get tough and traders will have to put the entire 50% cash margins. For 2 months, brokers and other market infrastructure institutions may get some breathing space, not much else.