SEBI Introduces Immediate Implementation of Revised Guidelines on Client Fund Upstreaming

December 13, 2023

In a move aimed at facilitating smoother operations for Stock Brokers (SBs), Clearing Members (CMs), and other stakeholders, the Securities and Exchange Board of India (SEBI) has recently issued a circular SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/187 dated December 12, 2023, introducing relaxations in certain areas concerning the upstreaming of clients' funds and monitoring mechanisms.

Key Highlights:

1.       Shift from Flow of Funds to Monitoring of Credit Balances

The focus has shifted from tracking the flow of funds to monitoring credit balances.

Example (a): Instead of moving money multiple times between accounts, brokers can directly allocate funds as credit balances to clients without sending them back and forth to the CC unnecessarily, unless the funds lying with CC less than credit balance of clients.

Example (b): If a client transfers funds into the Upstreaming account (U) but wishes to retrieve them promptly, the previous fund flow was C → U → S → CC → S → D → C. However, the revised flow allows for C → U → S → D → C.

2.       Removal of Reason Codes Requirement

The previously mandatory requirement to provide reason codes for fund movements has been removed.

Example: Previously, every transaction or movement of funds required a specific reason code for tracking. Now, such codes are no longer mandatory, simplifying the transaction process.

3.       Flexible Processing of Client Payouts

Brokers now have more flexibility around processing client payouts, especially during specific time windows.

Example: If a client requests a payout late in the evening, brokers have the flexibility to process it by the next day, ensuring that client funds are still protected and appropriately allocated.

4.       Clarifications on bank instruments provided by clients as collateral (i.e. client FDRs and BGs)

There have been clarifications on the rules surrounding client third-party FDs/BGs.

Example: High-net-worth clients previously had the flexibility to provide BGs directly in favor of the broker. However, this circular introduces clearer guidelines for such transactions to meet regulatory standards. These guidelines specify that only non-individual clients can use BGs as margins for the commodities segment, with net worth requirements set at either Rs. 1000 crores or Rs. 5000 crores for those linked to MNCs. Additionally, BGs must come from banks approved by CCs.

5.       Continuation of Certain Operational Requirements

While there have been significant changes, certain operational guidelines remain unchanged. For instance, the need to maintain separate accounts continues.

Example: Brokers are still required to maintain distinct accounts for different purposes, ensuring transparency and compliance with existing regulations.