Early Warning Mechanism to prevent diversion of client securities
Summary
This circular establishes an Early Warning Mechanism to detect the diversion of client securities by stock brokers. It mandates information sharing among Stock Exchanges, Depositories, and Clearing Corporations regarding specific financial and operational risk indicators. The document outlines preventive actions these entities must take upon detecting such risks, effective from February 1, 2019.
Text
It has been decided to put in place an Early Warning Mechanism and sharing of information between Stock Exchanges, Depositories and Clearing Corporations to detect the diversion of client’s securities by the stock broker at an early stage so as to take appropriate preventive measures.
Early warning signals, for prevention of diversion of clients’ securities, may include the following: Deterioration in financial health... Alerts for stock brokers maintaining multiple proprietary demat accounts... Increase in number of investor complaints... Alerts generated from the monthly / weekly submissions made by stock broker under Risk Based Supervision (RBS)... Stock broker’s terminal disabled...
Stock Exchanges and Depositories shall frame an internal policy / guidelines regarding non-cooperation by stock brokers and depository participants during inspections which shall lay down the time period, the type of documents critical for closing the inspections, which if not submitted, can be treated as non-cooperation.
Stock Exchanges / Clearing Corporations / Depositories, shall devise a mechanism to detect diversion of clients’ securities and to share information among themselves in respect of: Diversion of pay-out of securities to non-client accounts; Mis-matches between gross (client-wise) securities pay-in and pay-out files...
Alerts triggered at one Stock Exchange / Clearing Corporation / Depository through early warning mechanism shall be immediately shared with other Stock Exchanges / Depositories with respect to the stock broker / depository participant.
Based on the analysis of the early warning data, if it is established that the stock broker’s financial health has deteriorated and/ or he has made unauthorized transfer of funds / securities of the client, in such cases Stock Exchanges / Depositories shall jointly take preventive actions on the stock broker which may include one or more of, but not limited, to the following...
Actions to be initiated by the Stock Exchanges like: Blocking of certain percentage of available collaterals towards margin... Impose limits on proprietary trading by the stock broker... Initiate inspection of the stock broker / depository participant... Where client money and securities diversion is suspected, appoint forensic auditor...
Actions to be taken by the Depositories: Restriction on further pledge of client securities from the client’s account by freezing the stock broker client account for debit... Imposition of 100% concurrent audit on the depository participant... Cessation / restriction on uses of Power of Attorney (POA)...
Stock Exchanges, Clearing Corporations and Depositories are directed to implement the above early warning mechanism and preventive actions, with effect from February 01, 2019.
This circular is being issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992 and Section 19 of the Depositories Act, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.
Source: SecMarx — Early Warning Mechanism to prevent diversion of client securities. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.