As the broking industry braces for a significant change from October 14, firms are busy making back-end adjustments and updating software in preparation for the direct payout of securities.
The new regulation will have securities directly deposited from the clearing corporations (CCs) into investors’ demat accounts, aimed at ensuring that clients’ securities are not vulnerable to any misuse by brokers. But it also requires substantial system overhauls for brokers and their vendors.
Currently, clearing corporations credit the payout of securities to the pool accounts of brokerage houses, which then transfer them to the respective clients’ demat accounts.
Dhiraj Relli, CEO & MD of HDFC Securities, said: “We have given the requirements to the vendors and are awaiting feedback from the vendors. This includes back office vendors and depository systems vendors. Operationally and system-wise, there are changes required for a smooth transition, which we are in the process of implementing.”
The task is complex, as it involves coordination between brokers, their software vendors, and the clearing corporations. The changes mean integrating new software and ensuring that all systems are in sync with the clearing corporations that will now directly transfer securities to investors’ demat accounts.
“Our software system has to undergo major changes as the broker has to ensure smooth completion of the transaction along with successful auto pledge on securities where payments are due from the clients,” said Mini Nair, chief financial officer of Geojit Financial Services. “There will be additional cost in developing new features in the system; compliance cost has gone up considerably over the last few years due to the frequent changes in regulations,” Nair added.
While depositories and clearing houses have systems capable of handling the load — since this method was made optional for brokers in 2001 — it has come at significant costs and operational changes. Clearing corporations will need to provide APIs in advance to ensure smooth execution, avoiding any delays or errors.
The shift comes with added back-end expenses for brokerage firms, especially regarding software updates and compliance requirements. While the benefits of this change—such as faster settlements and enhanced security for client securities—are clear, brokerage firms, particularly smaller firms, are feeling the squeeze to update their systems without incurring significant costs.
“While this is a positive development, we will need to make back-office adjustments. We will be required to generate additional files and reports to track these direct payouts between clients and the clearing corporations,” said Trivesh D, COO of Tradejini.
“It will require a one-time effort of about two to four additional man-days of work, in terms of costs, to get this done by the back-office vendor. We will incur some operational expenses in terms of workforce hours and potential software upgrades,” he said.
Under the new system, brokers will no longer act as intermediaries between clearing corporations and clients. Instead, they will submit details of outstanding buy positions directly to the CCs, which will transfer shares to investors’ accounts. As the deadline approaches, brokerage firms are bracing for the final push to get their systems ready.