Segregation and Monitoring of Collateral at Client Level
Summary
The circular establishes a framework for the segregation and monitoring of client-level collateral to prevent misappropriation. It mandates specific reporting mechanisms by Trading Members and Clearing Members to provide visibility of collateral at all levels. Additionally, it outlines rules for collateral allocation, valuation, and the maintenance of minimum cash-equivalent holdings. This section details the procedural hierarchy for blocking margins against trades and defines specific collateral categories. It outlines the risk reduction mode monitoring mechanisms at both TM and CM levels, including calculations for excess margin utilization. Furthermore, it establishes protocols for collateral allocation changes, withdrawals, and a four-stage default management process involving settlement, portability, and close-out procedures. This section details the procedures for Stage 4, including the identification of defaulting clients and final appropriation of collateral by the MCSGFC. It outlines specific protocols for handling defaults by Trading Members (TMs) to Clearing Members (CMs), emphasizing that TM proprietary collateral absorbs residual losses without impacting other constitu
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SEBI put in place a framework of ‘Margin obligations to be given by way of Pledge/ Re-pledge in the Depository System’ to mitigate the risk of misappropriation or misuse of client’s securities available with the Trading Member (TM) / Clearing Member (CM) / Depository Participant (DP).
In order to further strengthen the mechanism of protection of client collateral from (i) misappropriation/ misuse by TM/ CM and (ii) default of TM/CM and/or other clients, SEBI issued a consultation paper on May 10, 2021 requesting market participants to provide their comments/ views on the proposed framework for segregation and monitoring of collateral at client level.
In light of the public comments and discussions with the stakeholders, it has been decided to adopt the following framework for segregation and monitoring of collateral at client level.
The reporting structure shall entail disaggregated information (segment-wise and asset type wise break-up) of each client collateral in the following manner: TM shall report disaggregated information on collaterals up to the level of its clients to the CM; CM shall report disaggregated information on collaterals up to the level of clients of TM and proprietary collaterals of the TMs to the Stock Exchanges (SEs) and CCs in respect of each segment.
The details to be submitted in the report shall essentially cover the following information, in order to provide a holistic view of the entire client collateral at various levels up to the level of CC: Client collateral received by TM, Client collateral retained by TM, Client collateral placed with CM, Client collateral retained by CM, Client collateral placed with CC.
The aforementioned information shall be required to be reported on a daily basis.
A web portal facility shall be provided by the CCs/ SEs to allow clients to view aforesaid disaggregated collateral reporting by TM/CM.
In case of securities collateral provided to CC through margin pledge/re-pledge in the Depository system, CC has visibility of the client to whom such securities belong to, and accordingly is able to assign the value of the securities collateral, based on applicable haircut, to that client’s account.
Similarly, for other forms of collateral placed with the CC, the CCs shall provide a facility to CMs for upfront segment-wise allocation of collateral to a TM/ client or CM’s own account. The CCs shall use such collateral allocation information to ensure that the collateral allocated to a client is used towards the margin obligation of that client only.
There shall be no change in the procedures pertaining to placing of securities as collateral through the margin pledge/re-pledge mechanism in the Depository system, and this collateral will be identified as belonging to a client or as being proprietary securities of the TM or CM, as the case may be, as per the existing procedures.
While depositing other forms of collateral i.e. Cash, Fixed Deposits (FDs), Bank Guarantees (BGs) or Government Securities provided through the SGL/CSGL route, etc, the CM shall allocate these collaterals into proprietary account of CM, and/or proprietary account of any TM clearing through the CM, and/or account of any of the clients (including Custodial Participants (CPs)) clearing through the CM, and/or of any of the clients trading through the TM who in turn is clearing through the CM, segment-wise.
In case of such collateral received by the CM from any TM, the CM shall not accept the same without the TM specifying break-up of such collateral into proprietary account of the TM and/or uniquely identified client account. Similarly, the CC shall not accept such collateral without the CM specifying appropriate break-up of such collateral into proprietary account of CM/ proprietary account of TM/ client account.
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Source: SecMarx — Segregation and Monitoring of Collateral at Client Level. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.