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TMI BlogEnhanced Supervision of Stock Brokers/Depository ParticipantsX X X X Extracts X X X X X X X X Extracts X X X X ..... viz. appointment, rotation of Internal Auditors, formulation of objective sample criteria, monitoring of quality of Internal Audit Reports, timeline for submissions of Internal Audit Reports, etc. IV. Monitoring of Financial Strength of Stock Brokers by Stock Exchanges so as to detect any signs of deteriorating financial health of stock brokers and serve as an early warning system to take preemptive and remedial measures. V. Imposition of uniform penal action on stock brokers/depository participants by the Stock Exchanges/Depositories in the event of non-compliance with specified requirements. VI. Other Requirements: a. Uploading client's funds and securities balances by Stock Brokers to Stock Exchange System and onwards transmission of the same to the clients for better transparency. b. Clarification on Running Account Settlement c. Providing PAN details of Directors, Key Management Personnel and Dealers, to Stock Exchanges and any change thereof. 2. The Stock Exchanges/Depositories are directed to: a. bring the provisions of this circular to the notice of the Stock Brokers/depository participants and also disseminate the same on their website ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... C Code Name of Account Purpose of Account (Own/Client/ Settlement) Date of Opening 2.2. The stock brokers shall inform the Stock Exchanges of existing and new demat account(s) in the following format: Name of DP Account Number/ Client ID DP ID Name of Account Holder PAN Sub-type/ tag of Demat Account (Proprietary/ Client/ Pool/ Collateral) Date of Opening 2.3. Stock Exchanges and/or Depositories, as the case may be, shall ensure the following: 2.3.1. All existing demat accounts maintained by stock brokers are assigned the appropriate nomenclature as mentioned above, within three months from the date of this circular. 2.3.2. All existing bank accounts maintained by stock brokers which do not have the above mentioned nomenclature, shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities between Name of the Stock Broker - Client Account to Name of the Stock Broker - Proprietary Account is permitted only for legitimate purposes such as, implementation of any Government/Regulatory directions or orders, in case of erroneous transfers pertaining to client's securities, for meeting legitimate dues of the stock broker, etc. For such transfer of securities, stock broker shall maintain a stock transfer register clearly indicating the day-wise details of securities transferred. 2.4.4. The Stock Exchanges shall monitor compliance with the above requirements, during inspections and the same shall be reviewed by the internal auditor of the broker during the half yearly internal audits. 2.5. As per existing norms, a stock broker is entitled to have a lien on client's securities to the extent of the client's indebtedness to the stock broker and the stock broker may pledge those securities. This pledge can occur only with the explicit authorization of the client and the stock broker needs to maintain records of such authorisation. Pledge of such securities is permitted, only if, the same is done through Depository system in compliance with Regulatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of Clients Funds lying with the Stock Broker by the Stock Exchanges 3.1. Stock Exchanges shall put in place a mechanism for monitoring clients funds lying with the stock broker to generate alerts on any misuse of clients funds by stock brokers, as per the guidelines stipulated in para 3.2 3.3 below. 3.2. Stock brokers shall submit the following data as on last trading day of every week to the Stock Exchanges on or before the next trading day: A- Aggregate of fund balances available in all Client Bank Accounts, including the Settlement Account, maintained by the stock broker across stock exchanges B- Aggregate value of collateral deposited with clearing corporations and/or clearing member (in cases where the trades are settled through clearing member) in form of Cash and Cash Equivalents (Fixed deposit (FD), Bank guarantee (BG), etc.) (across Stock Exchanges). Only funded portion of the BG, i. e. the amount deposited by stock broker with the bank to obtain the BG, shall be considered as part of B. C- Aggregate value of Credit Balances of all clients as obtained from trial balance across Stock Exchanges (after adjusting for open bills of clients, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s greater than |D|, then the stock broker has possibly utilised a part of funds of credit balance clients towards settlement obligations of debit balance clients and remaining part for his own purposes. In such cases the amount of client funds used for own purpose is calculated as follows: H= |G| - |D| 3.3.2. Funds of clients used for Margin obligation of proprietary trading: Stock Exchanges shall thereafter, verify whether the proprietary margin obligations (across Stock Exchanges) is less than the own funds and securities lying with the Stock Exchanges as collateral deposit, as follows: Principle: The sum of Proprietary funds and securities i.e. (G + E + F) lying with the clearing corporation/clearing member should be greater than or equal to Proprietary margin obligations (P) If value of G is positive (i.e. A+B C), then proprietary funds are lying with the clearing corporation/clearing member and/or client bank accounts along with the clients funds to the extent of positive value of G. The sum of the proprietary funds (positive value of G), the value of proprietary securities (E) and the non-funded portion of bank guarantee (F) available in the Stock Excha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clients and proprietary margin obligations. This value of J acts as an alert to the Stock Exchanges on the possible misutilisation of clients' funds towards margin obligations of debit balance clients and proprietary margin obligations. 3.4. Based on the alerts generated, Stock Exchange shall, inter-alia, seek clarifications, carry out inspections and initiate appropriate actions to protect the clients funds from being misused. Stock Exchanges shall also maintain records of such clarifications sought and details of such inspections. The aforesaid calculations are illustrated in tabular format in Table 1, 2 3 given at the end of the annexure. 3.5. Stock Exchanges shall put in place the aforesaid monitoring mechanism within three months from the date of this circular and carry out the monitoring of clients funds for all stock brokers, except for those who are carrying out only proprietary trading and/or only trading for institutional clients. 3.6. Stock Brokers shall ensure due compliance in submitting the information to the Exchanges within the stipulated time. 4. Internal Audit of Stock Broker 4.1. SEBI vide Circular MIRSD/DPSIII/Cir-26/08 dated August 22, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of selecting a minimum number of KYCs, the sample selected may be a certain percentage of the top clients in each client category (Corporate, Partnership, Individual, Trust, Others) based on total turnover on the Stock Exchange and whose account has been opened during the audit period. For each theme/area of audit, internal audit report shall clearly specify the sample size verified, number of instances where adverse observations have been made as also the details of the adverse observations. Stock Exchanges shall issue detailed guidelines regarding the above before March 31, 2017. 4.4. Monitoring of quality of Internal Audit Reports 4.4.1. The Stock Exchange shall every year identify a certain number of internal auditors based on criteria, such as, number and size of stock brokers audited, discrepancy in findings of auditor vis-a-vis Stock Exchange inspection, regulatory actions taken against the auditor/partners/directors, etc. A certain number of stock brokers who have been audited by these identified internal auditors shall be selected for inspection by the Stock Exchanges. The selection of these stock brokers shall be on the basis of the Supervisory Risk Rating Score der ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a broker except those owed to his shareholders) / (Net worth) b. (Value of Investments or advances or loans to group companies or associates or firms or entities) / (Net worth) c. (Value of maximum outstanding inter corporate debt during the year) / (Net worth) d. (Value of maximum outstanding inter corporate debt during the year) / (Share capital) 5.2. Stock brokers shall submit financial statements to Stock Exchanges in the same format as prescribed under Companies Act, 2013 irrespective of whether they fall under the purview of Companies Act, 2013 or not. The due date for submission of the aforesaid financial statements to Stock Exchanges shall be the same as prescribed under Companies Act, 2013 for submission to Registrar of Companies. 5.3. No stock broker shall appoint or re-appoint- a) an individual as statutory auditor for more than one term of five consecutive years; and b) an audit firm as statutory auditor for more than two terms of five consecutive years: Provided that- 5.4. An individual statutory auditor who has completed his term under clause 5.3 (a) above shall not be eligible for re-appointment as statutory auditor in the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oker. i. If, at any point of time, Net worth of the Broker is negative or lower than 75 per cent of the requirement. j. In case stock broker shares incomplete/wrong data or fails to submit data on time. k. Failure to submit financial statements as per timeline prescribed under Companies Act, 2013 6.1.2. Monitoring criteria for Depository Participants a. Failure to furnish Networth certificate to Depository for year ending March 31st by September 30th. b. Failure to furnish Internal Audit report to Depository for half year ending September 30th by November 15th and half year ending March 31st by May 15th. c. Failure to co-operate with the Depository for conducting inspection by not submitting all the information/records sought within 45 days from the due date specified in the letter of intimation. d. Failure to submit data for the half yearly Risk Based Supervision within the time specified by Depositories. e. Failure to furnish half yearly compliance certificate/report to Depository for half year ending June 30th by July 30th and half year ending December 31st by January 31st. f. Failure to furnish monthly Investor grievance report by 10th d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh National Electronic Funds Transfer (NEFT), Real Time Gross Settlement (RTGS), etc. 8.1.3. The required bank details for initiating electronic fund transfers shall be obtained from new clients and shall be updated for existing clients. Only in cases where electronic payment instructions have failed or have been rejected by the bank, then the stock broker may issue a physical payment instrument. 8.1.4. Statement of accounts containing an extract from client ledger for funds securities along with a statement explaining the retention of funds/securities shall be sent within five days from the date when the account is considered to be settled. 8.2. The above provisions shall be applicable 3 months from the date of this circular. 9. Providing PAN Number 9.1. The stock brokers shall provide Permanent Account Numbers of all their Directors, Key Management Personnel and dealers to the Stock Exchanges within three months from the date of this circular. Any change in the aforesaid details/information shall be intimated to the Stock Exchanges within seven days of such change. Table 1 RECONCILIATION - Funds of credit balance clients used for settlement obligati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities Deposited as Collateral with Clearing corporation/ Clearing member - across all Stock Exchanges Non funded portion of the Bank Guarantee (F) - across all Stock Exchanges Proprietary margin Obligation- across all Stock Exchanges Difference G (from the reconciliation stage I - positive value) E F P I = P - (G+E+F) Proprietary Obligation mentioned in column P shall be the sum of cash margin obligations and derivative margin obligations for proprietary trading as on reporting day. Table 3 RECONCILIATION - Funds of credit balance clients used for Margin obligations of debit balance clients and proprietary trading: Total of end of the day balance in all Client Bank Accounts- across all Stock Exchanges Total Credit Balance of all clients (after adjusting for open bills and uncleared cheques)- across all Stock Exchanges Collateral deposited with clearing corporation/ clearing member ..... X X X X Extracts X X X X X X X X Extracts X X X X
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