Stock market brokers are against a SEBI circular that directs them to submit only fixed deposit receipts (FDRs) from clients with a maturity period of less than 365 days for margin purposes to clearing houses (CCs). Brokers claim that such a requirement will lead to huge losses for their clients, as most have submitted FDs with maturities longer than 365 days, and any premature withdrawal can result in huge penalties. On July 26, the broker association ANMI wrote a letter to SEBI explaining the pain, asking for grandfathering of longer FDRs submitted through July.
In the normal course, brokers submit thousands of crores of bank FDs to exchange clearing companies to benefit from trading limits. For client-related trading limits, brokers submit FDRs collected from clients. For proprietary trades, brokers submit their own FDRs. But a June 6 SEBI circular says FDRs that don’t meet SEBI requirements won’t be valid after July 1.
The SEBI circular has stipulated certain conditions for “upstream client circulars” by securities brokers to clearing houses. The upstream is nothing but brokers who collect FDs from clients and submit them to clearing houses.
The SEBI circular stipulated that each FDR should be marked for the benefit of clearing companies and that its duration should not exceed one year. Furthermore, these FDs should be pre-cancellable upon request and the principal amount of the FDR will remain protected throughout the tenure, even after taking into account all possible pre-cancellation costs. SEBI also said that brokers cannot benefit from any funded or unfunded bank facilities based on FDRs created from client funds.
The brokers have urged SEBI to protect the maturity of their FDR, which means that FDRs already submitted until July 2023 are allowed.
“We urge that the maturity period of existing FDs be maintained and that new FDs to be created after July 1, 2023 be allowed beyond 365 days because not only is there a gap in yields between a 365 days and 365+1 day but also higher maturities. Our members will be at a loss to earn FD returns due to the 365 day cap. If there are any apprehensions on the 365+ day FD maturity, please let us know of concerns that we can address to the extent possible or suggest alternative measures,” read ANMI’s letter to SEBI, accessible by Zee Business.
In addition, ANMI’s letter states that restricting the receipt of funds from clients, especially in the case of clients with a market to market (MTM), will cause unnecessary hardship for brokers and clients. “If the receipt of client funds is restricted, the client may not be able to trade on the morning of the next trading session and brokers may also have problems in complying with the T+0 regulation for FNO and T+1 for the spot market,” the letter read.
FDR Confusion for Proprietary Trading Limits
In addition, ANMI has started discussions with a clearing house that insists on implementing new FDR standards for proprietary trading as well, even though the SEBI circular makes no mention of it, a member said. at Zee Business.
“One of the CCs was creating confusion when submitting FDRs for proprietary traders. Trades made by brokers on their own books and not for one of the clients are proprietary trades. Brokers say a exchange informed them that the upstream of customer funds is not applicable in the equity measure, a CC issued a clarification last week stating that all existing FDR liens marked to it will have a residual maturity of one year and that FDRs not meeting the requirements must be released by July 1, 2023,” the broker said.
The email sent to SEBI on ANMI’s letter went unanswered.