SEBI’s Smart & Simple System to Ensure Your Money & Securities Are Safe7 min read
What is SEBI, and what does it mean to you?
SEBI (Securities and Exchange Board of India) is the regulator of the securities market in India. It has the responsibility of protecting the interests of investors who invest in securities such as shares, bonds, mutual funds, etc. SEBI has recently introduced a new system to ensure that investors’ money and securities are safe and not misused by brokers or intermediaries. This system is called Segregation and Monitoring of Collateral at the Client Level.
- Collateral is the money or securities that an investor gives to a broker for trading.
- Collateral can be cash or non-cash assets like shares, bonds, etc.
- Segregation means keeping the collateral of each investor separate from others and the broker.
- Monitoring means checking and reporting the collateral’s status and movement regularly.
Why this new rule was needed?
The new SEBI regulation states that:
- Brokers have to keep the client’s money and securities separate from their own.
- Brokers have to use the client’s money and securities only for the client’s needs.
- Brokers have to report how they use their client’s money and securities every day.
- This rule is to protect the client’s money and securities from being misused or lost by the brokers, as has happened in the past with old or traditional brokers.
Details of the change:
The new system of Segregation and Monitoring of Collateral at the client level requires that:
- The broker (Trading Member or TM) must report to the clearing house (Clearing Member or CM) how much collateral it has received from each investor and how much it has kept with itself or placed with the clearing house.
- The clearing house must report to the stock exchange (SE) and the clearing corporation (CC) how much collateral it has received from each broker and how much it has kept with itself or placed with the clearing corporation.
- The clearing corporation must provide a web portal facility for the investors to view their collateral status and movement at any time.
How does the new system benefit investors?
- It prevents the broker from using one investor’s collateral to meet the obligations of another investor or itself.
- It protects the investor’s collateral from being affected by the default of the broker or other investors.
- It gives the investor more transparency and control over their collateral.
In layman’s terms, consider the following example:
Let’s understand these complex terminologies with a very simple yet real life example.
Suppose you want to buy some clothes from an online store. You have to pay some money in advance to the store as a security deposit. This money is your collateral. The store is the broker who helps you buy the clothes from the seller. The seller is the clearing house that delivers the clothes to you. The stock exchange and the clearing corporation are the authorities that regulate the transactions between the buyers and sellers.
Now, there are two ways the store can handle your collateral:
- The old way: The store can mix your collateral with the collateral of other buyers and its own money. It can use this money for any purpose, such as buying more clothes, paying its expenses, or lending it to someone else. This way, you don’t know how much of your money is left with the store or where it is. If the store or any other buyer fails to pay for their clothes, your money can be used to cover their losses. You may not get your money back or your clothes on time.
- The new way: The store has to keep your collateral separate from the collateral of other buyers and its own money. It has to report to the seller how much money it has received from you and how much it has kept with itself or placed with the seller. The seller has to report to the authorities how much money it has received from the store and how much it has kept with itself or placed with the authorities. The authorities have to provide a website for you to check your collateral status and movement at any time. This way, you know exactly how much of your money is left with the store or where it is. If the store or any other buyer fails to pay for their clothes, your money cannot be used to cover their losses. You can get your money back or your clothes on time.
Hope this helps you to understand how SEBI is trying to protect individual investor’s money from other investors or a matter of fact, from the broker’s money, which it uses for other purposes than investor’s money.
Conclusion Paytm Money Way:
To conclude, let me give you another example with shares. Suppose you want to buy some shares of a company listed on the stock market. In order to do so, you have to deposit some money or shares with your broker as a margin or collateral. This is the money or shares that you give to the broker as a guarantee for trading in the stock market.
Here, Paytm Money is the trading member who helps you buy and sell shares from the clearing member. The clearing member (here Paytm Money is self-Clearing Member) is the intermediary who delivers the shares to you from the clearing corporation – CC (CCs are ICCL i.e. Indian Clearing Corporation Ltd. a subsidiary of Bombay Stock Exchange – BSE & NCCL i.e. National Clearing Corporation Ltd. a subsidiary of National Stock Exchange – NSE). The stock exchange and the clearing corporation are the authorities who regulate the transactions between buyers and sellers.
Now, there are two ways Paytm Money can handle your margin or collateral:
- The old way: The broker can mix your margin or collateral with the margin or collateral of other clients and its own funds. It can use this money or shares for any purpose, such as buying more shares, paying its expenses, or lending it to someone else. This way, you don’t know how much of your money or shares are left with the broker or where they are. If the broker or any other client fails to pay for their shares, your money or shares can be used to cover their losses. You may not get your money or shares back on time.
- The new way: The broker has to keep your margin or collateral separate from the margin or collateral of other clients and its own funds. It has to report to the clearing member how much money or shares it has received from you and how much it has kept with itself or placed with the clearing member. The clearing member has to report to the authorities how much money or shares it has received from the broker and how much it has kept with itself or placed with the clearing corporation. The clearing corporation has to provide a web portal facility for you to view your margin or collateral status and movement at any time. This way, you know exactly how much of your money or shares are left with the broker or where they are. If the broker or any other client fails to pay for their shares, your money or shares cannot be used to cover their losses. You can get your money or shares backs on time.
The new way is what SEBI has introduced for the securities market in India. It is called Segregation and Monitoring of Collateral at Client Level. It ensures that your money and securities are safe and are not misused by the brokers or intermediaries. It gives you more transparency and control over your margin or collateral.
Kindly refer to the relevant SEBI & NSE Circulars here.
Disclaimer: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. This content is purely for information purpose only and in no way to be considered as an advice or recommendation. Paytm Money Ltd SEBI Reg No. Broking – INZ000240532. NSE (90165), BSE(6707) Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019. For complete Terms & Conditions and Disclaimers visit: https://www.paytmmoney.com.
Written by: Alpesh Soni
