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TMI BlogEarly Warning Mechanism to prevent diversion of client securitiesX X X X Extracts X X X X X X X X Extracts X X X X ..... stances of diversion of securities come to light when stock broker failed in meeting the margin and/ or settlement obligations to Stock Exchange / Clearing Corporation. 2. It has been decided to put in place an Early Warning Mechanism and sharing of information between Stock Exchanges, Depositories and Clearing Corporations to detect the diversion of client s securities by the stock broker at an early stage so as to take appropriate preventive measures. The threshold for such early warning signals shall be decided by the Stock Exchanges, Depositories and Clearing Corporations with mutual consultation. 3. Early warning signals, for prevention of diversion of clients securities, may include the following: 3.1. Deterioration in finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares to stock broker proprietary accounts and vice a versa. c) Transfer of large value of shares through off-market transfers other than for settlement purposes. d) Invocation of pledge of securities by lenders against stock broker or his clients. e) Significant depletion of client s shares in the stock broker client account maintained by the stock broker. 3.3. Increase in number of investor complaints against the stock broker / depository participant alleging un-authorized trading / unauthorized delivery instructions being processed and non-receipt of funds and securities and non-resolution of the same. 3.4. Alerts generated from the monthly / weekly submissions made by stock broker under Risk Based Supervision (RBS) or Enh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong themselves in respect of: 5.1 Diversion of pay-out of securities to non-client accounts 5.2 Mis-matches between gross (client-wise) securities pay-in and pay-out files of a stock brokers generated by the Clearing Corporation which shall be compared with actual transfer of securities to/from the client s depository accounts by the Depository. The cases of any mismatch found out by the Depository shall be informed to the concerned Stock Exchange / Clearing Corporation. 5.3 Stock Exchange shall seek clarification from the concerned stock broker on the mismatches reported by Depository and identify transfer to a non-client / third party, without any trade obligation. 5.4 Such information on wrong / fraudulent / unauthorized tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate explanation. g) Uniform action of deactivation of trading terminals by all Stock Exchanges based on the communication received from other Stock Exchange. h) Initiate inspection of the stock broker / depository participant. i) Cross check information submitted by stock broker with other independent sources like collateral details with the Clearing Corporation, transactions in Bank and Depositories, with statement collected directly etc. j) Where client money and securities diversion is suspected, appoint forensic auditor to trace trails of entire funds and securities of clients. 8.2. Actions to be taken by the Depositories: a) Restriction on further pledge of client securities from the client s account by freezing th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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