Brokers will now be penalised because of failure to comply with the ‘short allocation’ norms, according to a notice from the exchanges that took effect from Tuesday.
Experts say the imposition of penalty is meant to enhance transparency by ensuring compliance with Sebi’s diktat that came into effect on August 1, 2022. The regulation requires brokers to report client-specific allocation of funds in real time to clearing corporations, which will then set client-wise limits.
This is to ensure funds pledged by one client cannot be used to fulfil the margin requirements of another. Brokerages may, however, be given a waiver if they report instances of short allocation with valid reasons.
“Earlier, funds pledged by clients with brokers were reported on an overall basis to clearing corporations, at the broker’s level. With this change, funds allocated to each client for different segments have to be reported in real time,” said Tejas Khoday, co-founder and CEO of FYERS, a broking-tech platform.
He added that while the regulation has been in place since a year-and-a-half, penalties were not imposed till now. The penalty for failure to comply will be 1% of the short allocation, per day. The idea, he said, is to ensure transparency regarding clients and to monitor trades on an intra-day basis.
A notification by the exchanges last week defined short allocation as the difference between the minimum client margin requirement and the client collateral value in the segment.
Further, the minimum client margin collection will, hereon, exclude margins that can be collected at settlement. It shall only refer to margins required to be collected on an upfront basis.
So how has it changed the game for brokers?
The CEO of a brokerage, who did not wish to be named, said the total fund requirement for brokerages with respect to allocation will increase. This is because if a client wishes to make a purchase beyond the specified cash margin, the balance has to be arranged by the broker and declared as upfront allocation to the depository. The early pay-in, too, which used to take place at the end of the day, will now happen in real-time.
“Given that these take place simultaneously for multiple clients, the transaction charges will spike,” said the CEO. He said with multiple regulations in place, monitoring of clients’ funds is not an easy task, and penalties only add to pressure on brokerages.
Analysts say peak margins are calculated by the exchanges throughout the day for various segments, based on the trades. In case the peak margin exceeds the set limit for a client, a penalty of 1% of the short allocation amount will be imposed on the broker for the first three instances in a month. From the fourth instance onwards, the penalty will rise to 5% of the short allocation amount.
Though the regulator has sought to tighten the norms to protect clients’ funds, the move will lead to a sharp drop in volumes and could hamper the dynamics of the market, said a market strategist with a brokerage.
“Funds received in a day have to be reported to the exchanges and recorded in the system immediately, which could lead to a delay in allocation. Even a lag of a minute or two makes a huge difference, and will cause reduction in volumes. This is because brokerages will now be more fearful of lapses and may go slow on execution,” he pointed out.