Sebi proposes to block funds facility for trading on secondary market

Sebi, the capital markets regulator, proposed Tuesday that a blocking facility be established for secondary market trading. This move was intended to protect investors’ money against misuse and default by stockbrokers.

This is similar to the Application Supported by Blocked Amount facility (ASBA), which is already available for primary market. It ensures that money from investors gets moved only when there is an allotment.

Sebi stated that the proposal to introduce a blocking facility for trading on secondary markets would permit investors to trade on secondary markets based upon blocked funds in their bank accounts. This would eliminate the need to transfer funds directly to stock brokers.

The facility will also provide client-level settlement visibility (both the pay-in as well as the pay-out) for clearing corporations (CC). This would allow direct settlement of funds or securities between investor or client and CC.

This process protects client assets against misuse and brokers default, which can lead to capital loss.

The existing framework allows clients’ assets to pass through stock broker and clearing members before reaching CC. Similar to the above, CC’s pay-out is released in a similar manner. It passes through stock brokers and clearing members before reaching the client.

Although CCs give final settlement instructions to their members every day, it’s the stock broker that settles clients’ obligations.

The Securities and Exchange Board of India has invited public comments on the proposal until February 16, according to Sebi.

Market regulator suggested that Unified Payments Interface Mandate Service of single block, multiple debits and integrated with secondary markets can provide a block mechanism (similar in pledge-like mechanism for securities). Clients will be able block funds in their bank accounts to trade in secondary market. This will increase cash collateral protection.

The proposed model would allow funds to remain in client’s account, but they will be frozen in favour of CC until the expiry of the block mandate, or until the block is released. CC can debit funds from the client account up to the amount in the block.