Standard Operating Procedure in the cases of Trading Member / Clearing Member leading to default
Summary
This circular establishes a Standard Operating Procedure for Recognised Stock Exchanges, Clearing Corporations, and Depositories to handle defaults by Trading or Clearing Members. It outlines specific triggers, such as fund shortages or settlement failures, that initiate early warning mechanisms. The document details a strict timeline of actions ranging from inspections and trading terminal disablement to the liquidation of client positions. This section details the specific actions required from ISEs, SEs, CCs, and Depositories following a trading member's disablement or default trigger. It mandates immediate freezing of accounts, suspension of services, and concurrent audits to protect client assets and securities. The text further outlines procedures for collateral invocation, interim settlement of investor claims, and the issuance of show cause notices. This section provides the template for an Affidavit of Undertaking cum Indemnity Bond to be submitted by a trading or clearing member to a stock exchange or clearing corporation. It outlines the member's unconditional agreement to allow the freezing of bank accounts in the event of potential default, as per SEBI circulars and am
Text
To protect the interest of non-defaulting clients... there is a need for Standard Operating Procedure (“SoP”) enumerating the steps to be taken by the SEs / CCs / Depositories in such cases where SE / CC is of the view that TM / CM is likely to default
In order to harmonize the action amongst all SEs / CCs / Depositories in a time bound manner this SoP has been prepared... so as to achieve uniformity in implementation of actions
On analysis of early warning signals or any of the following triggers, if the SE / CC is of the view that the TM / CM is likely to default... where: a) There is shortage of funds / securities payable to the clients by Rs. 10 crore... b) TM / CM has failed to meet the settlement obligations... c) There is sudden increase in the number of investor’s complaints
Seek documents / explanation or Meeting with designated directors of TM
A limited purpose joint inspection of TM shall be initiated. ISE along with other SEs shall send a team of officials for taking possession of the copy of the books of accounts and other relevant records including but not restricted to securities register, trial balance, client master, bank books, debtors and creditors ledger (preferably in electronic mode) for the last 3 years
The explanations offered by the designated director(s) of the TM shall be analysed by the ISE and based on the information available, to protect the interest of non-defaulting clients, as an interim measure, the trading terminal of the TM may be directed to be disabled by the Managing Director of the ISE for reasons to be recorded in writing
A preliminary assessment of assets and liabilities of the TM shall be completed by the ISE
ISE shall issue a notice / circular informing the disablement of the TM in all segments
ISE shall communicate the decision of disablement of the trading terminal(s) of the TM along with detailed reasons for disablement to the TM and CM(s) with an advice to CM(s) to square-off open positions of TM and its clients
ISE shall inform the Depositories about the disablement immediately and advice Depositories to freeze the demat accounts of the TM (including TM Pool Accounts). Any debit in the demat account of TM shall be made under supervision of ISE
ISE shall inform other SEs about the disablement immediately and the other SEs shall disable the said TM on receipt of information and the other SEs shall intimation Issue a notice / circular in this regard
TM may also stand suspended to act as a client with any other TM / CM in any other segment / SEs
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Source: SecMarx — Standard Operating Procedure in the cases of Trading Member / Clearing Member leading to default. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.