Handling of Client’s Unpaid Securities by Trading Members
Summary
This circular amends Paragraph 46 of the Master Circular for Stock Brokers to regulate how Trading Members handle client unpaid securities. It mandates direct pay-out to demat accounts followed by auto-pledging into a separate CUSPA account and establishes strict timelines for pledge invocation, release, and liquidation. The document also outlines implementation schedules and directs exchanges and depositories to update their operational guidelines and systems accordingly.
Text
Paragraph 46 of the Master Circular specifies provisions with respect to Handling of Client’s Securities by Trading Members (TM)/ Clearing Members (CM).
In order to enhance the ease of doing business for stockbrokers and ease of doing investment for clients, it has been decided to amend Paragraph 46 of the Master Circular.
For trades not covered under margin trading facility (MTF), the pay-out of unpaid securities shall be directly made to the client’s demat account followed by creation of an auto-pledge... in favor of a separate account titled –“client unpaid securities pledgee account (CUSPA)”, which shall be opened by TM.
After the creation of pledge, a communication (email / SMS) shall be sent by TM informing the client about the client’s funds obligation and also about the right of TM to sell such securities in the event of failure by client to fulfill such obligation.
The TM shall formulate and maintain a policy, either on standalone basis or as part of its Risk Management Policy, for handling unpaid securities... and communicate the same to all clients prior to implementation.
The policy must include clear processes and indicate reasons, manner, timing etc. pertaining to invocation/release of pledge and liquidation of unpaid securities. Such policy must indicate the maximum period (shall not exceed five trading days from the pay-out date) within which the client must meet the payment obligation.
While unpaid securities pledged to CUSPA of TM may be considered for reporting client margin collection to Clearing Corporation, the TM shall not allow exposure on the basis of such securities to the client.
During the period in which client’s funds obligation for unpaid securities continue, the TM shall, on daily basis, determine the maximum value of securities that may remain pledged in accordance with the operational guidelines issued by the exchanges from time to time.
If the value of pledged securities exceeds this maximum pledge value, the TM shall release the pledge on the appropriate quantity of securities corresponding to the excess value on or before next trading day in accordance with operational guidelines of the exchanges.
If the client fails to meet the payment obligation within the prescribed timeline, the TM shall, in accordance with its policy, invoke the pledge and liquidate the unpaid securities. The TM shall give reasonable notice to the client before invocation of pledge and liquidation of unpaid securities.
On invocation, the securities shall be blocked for early pay-in in the client’s demat account with a trail being maintained in the TM’s CUSPA account... The unpaid securities shall be sold in the market with Unique Client Code (UCC) of the respective client. Any surplus funds remaining after settling the client’s obligation shall be credited to the client’s ledger.
In case, such pledge on unpaid securities is neither invoked nor released within five trading days after pay-out, the pledge on securities shall be automatically released by the depositories at the end of the sixth trading day after pay-out, and the securities shall become available to the client as free balance without encumbrance.
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Source: SecMarx — Handling of Client’s Unpaid Securities by Trading Members. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.