Upstreaming of clients’ funds by Stock Brokers (SBs) / Clearing Members (CMs) to Clearing Corporations (CCs)

Posted On - 24 January, 2024 • By - King Stubb & Kasiva

SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/187                                    12th December 2023

[1]To facilitate ease of doing business, SEBI, on December 12, 2023, introduced adjustments to the framework governing the obligation of stock brokers and clearing members to upstream clients’ funds to clearing corporations. This modification was a response to feedback received from various stakeholders, including stock brokers and brokers’ associations, who identified operational challenges in implementing the existing framework.

In light of these concerns, SEBI specified that stock brokers (SBs) or clearing members (CMs) are mandated to upstream all clients’ clear credit balances to clearing corporations (CCs) on an End of Day (EOD) basis. This transfer is limited to cash, liens on Fixed Deposit Receipts (FDRs) created from clients’ funds, or pledges of units from Mutual Fund Overnight Schemes (MFOS) also created from clients’ funds.

To streamline this process, stock brokers are required to maintain a designated client bank account for receiving funds from clients. The nomenclature of such accounts will be changed to two categories: Upstreaming Client Nodal Bank Account (USCNBA) and Downstreaming Client Nodal Bank Account (DSCNBA).

Under the USCNBA, SBs/CMs will receive clients’ funds, while payments to clients will only be made from the DSCNBA. CMs handling trades for other stock brokers will use a designated bank account labeled “Name of the CM-TM prop account” for receiving or paying proprietary funds from/to stock brokers.

Clients can request the release of funds at any time during the day, with all payment requests processed by the next settlement day if received on the same day. In cases where a payment request is not processed promptly, SB/CMs must ensure that the client’s funds are placed with the CCs.

To enhance operational efficiency and reduce transaction costs, CCs will establish a mechanism for utilizing surplus unutilized collateral in cash form towards fund pay-in requirements across segments.

Furthermore, SEBI clarified that clients’ bank instruments cannot be upstreamed to CCs and are ineligible as collateral in any securities market segment. However, to support hedging in the commodity derivatives market, SEBI has decided to permit bank guarantees exclusively from non-individual clients, subject to specified terms and conditions. Such clients must provide a declaration and underwriting, acknowledging that they will not hold SEBI or exchanges responsible in case of wrongful invocation of these bank guarantees by stock brokers or clearing members.