Margin obligations to be given by way of Pledge/ Re-pledge in the Depository System
Summary
This circular mandates that margin obligations for securities must be executed exclusively through the 'margin pledge' mechanism within the Depository System, effective June 1, 2020. It prohibits title transfer collateral arrangements and requires Trading Members and Clearing Members to maintain specific segregated demat accounts for client margin pledges. The document outlines the operational procedures for initiating, re-pledging, and monitoring these securities to prevent misappropriation. This section outlines the procedures for releasing margin pledges based on internal risk checks and specific requests from clients or intermediaries. It details the invocation processes for pledged securities in various default scenarios involving clients, Trading Members (TMs), Clearing Members (CMs), and Clearing Corporations (CCs). Additionally, it establishes a framework for collateral utilization, specifying margin computation responsibilities and restrictions on using client re-pledged securities for proprietary positions.
Text
SEBI had extensive consultations with Stock Exchanges, Clearing Corporation and Depositories and industry representatives of Trading Members (the “TM”) / Clearing Members (the “CM”) / Depository Participants (the “DP”), to devise a framework that mitigates the risk of misappropriation or misuse of client’s securities available with the TM / CM / DP.
With effect from June 01, 2020, TM / CM shall, inter alia, accept collateral from clients in the form of securities, only by way of ‘margin pledge’, created in the Depository system in accordance with Section 12 of the Depositories Act, 1996 read with Regulation 79 of the SEBI (Depositories and Participants) Regulations, 2018 and the relevant Bye Laws of the Depositories.
Any procedure followed other than as specified under the aforesaid provisions of law for creating pledge of the dematerialised securities is prohibited. It is clarified that an off-market transfer of securities leads to change in ownership and shall not be treated as pledge.
Transfer of securities to the demat account of the TM / CM for margin purposes (i.e. title transfer collateral arrangements) shall be prohibited. In case, a client has given a power of attorney in favour of a TM / CM, such holding of power of attorney shall not be considered as equivalent to the collection of margin by the TM / CM in respect of securities held in the demat account of the client.
Depositories shall provide a separate pledge type viz. ‘margin pledge’, for pledging client’s securities as margin to the TM / CM. The TM / CM shall open a separate demat account for accepting such margin pledge, which shall be tagged as ‘Client Securities Margin Pledge Account’.
For the purpose of providing collateral in form of securities as margin, a client shall pledge securities with TM, and TM shall re-pledge the same with CM, and CM in turn shall re-pledge the same to Clearing Corporation (CC). The complete trail of such re-pledge shall be reflected in the de-mat account of the pledgor.
The TM shall re-pledge securities to the CM’s ‘Client Securities Margin Pledge Account’ only from the TM’s ‘Client Securities Margin Pledge Account’. The CM shall create a re-pledge of securities on the approved list to CC only out of ‘Client Securities Margin Pledge Account’.
In this context, re-pledge would mean endorsement of pledge by TM / CM in favour of CM/CC, as per procedure laid down by the Depositories.
The TM and CM shall ensure that the client’s securities re-pledged to the CC shall be available to give exposure limit to that client only. Dispute, if any, between the client, TM / CM with respect to pledge, re-pledge, invocation and release of pledge shall be settled inter-se amongst client and TM / CM through arbitration as per the bye-laws of the Depository. CC and Depositories shall not be held liable for the same.
Securities that are not on the approved list of a CC may be pledged in favour of the TM / CM. Each TM / CM may have their own list of acceptable securities that may be accepted as collateral from client.
Funded stocks held by the TM / CM under the margin trading facility shall be held by the TM / CM only by way of pledge. For this purpose, the TM / CM shall be required to open a separate demat account tagged ‘Client Securities under Margin Funding Account ’ in which only funded stocks in respect of margin funding shall be kept/ transferred, and no other transactions shall be permitted.
The TM / CM shall be required to close all existing demat accounts tagged as ‘Client Margin/ Collateral’ by June 30, 2020. The TM / CM shall be required to transfer all client’s securities lying in such accounts to the respective clients’ demat accounts.
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Source: SecMarx — Margin obligations to be given by way of Pledge/ Re-pledge in the Depository System. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.