Operating Guidelines for Trading Supported by Blocked Amount in Secondary Market – NSE
Segment: Equity Cash Segment
In an effort to streamline trading in the secondary market, the Securities and Exchange Board of India (SEBI) has introduced a supplementary process known as the Facility. Under this process, trading is based on the amount blocked in an investor’s bank account. This circular outlines the operational guidelines for the Facility.
Registration for the Facility
Availing the Facility is at the discretion of investors, while offering the Facility is optional for trading members (TMs).
- On a pilot basis, TMs can offer the Facility to a limited number of clients.
- The Facility is not available for clients who avail the margin trading facility (MTF).
- The Facility is extended to resident individuals and Hindu undivided families (HUFs). Only individuals and HUFs settling their trades with their respective TMs are eligible to avail the Facility. Investors who have appointed a Custodian clearing member to clear their trades are not eligible to avail the Facility. Exchanges will only allow these categories of investors to register for the Facility.
Mechanism for Enrollment
Exchanges will provide a mechanism in the UCC database for clients wishing to enroll in the Facility. During registration, TMs need to provide one primary bank and demat account for the client. Funds and securities pay-out due to the client will be provided by the clearing corporation (CC) in the primary bank and primary demat accounts respectively. Additional bank accounts can also be maintained for the registered client. The client may create a Unified Payments Interface (UPI) block in favor of the CC using any or all of the primary or additional bank accounts.
Mandatory PAN Requirement
To avail the Facility, PAN is mandatory. Exchanges, through UPI/NPCI, will verify that the PAN maintained in the UCC database matches the PAN of the first holder with the bank where the client’s account is held (for both primary and additional accounts). Exchanges will also verify the PAN maintained in the UCC database with the PAN of the first holder in the demat account with the depositories. Successful validation of both the bank and demat accounts is required for clients to avail the Facility. Accounts without PAN details in the banks/depositories cannot be registered and will not be able to avail the Facility.
De-registration and Client Management
Exchanges will provide a mechanism for clients to de-register from the Facility. De-registration is subject to approval from the designated clearing corporation (CC). TMs may de-register a client at the client’s request or if the client does not meet the TM’s conditions for participation in the Facility.
Registration Process
TMs can register a client using the UCC database of all exchanges. CCs will receive data from all exchanges and consider the latest available data for registration.
Effective Dates and Settlement
Registration and de-registration requests received by 21:00 hours on a “T” day, subject to successful validation, will be processed from T+2 day (BOD). In the case of registration requests, trades done on the client’s behalf on “T” and “T+1” will be settled using the prevalent process, while trades done on “T+2” day will be settled under the Facility. Similarly, in the case of de-registration, trades done on “T” and “T+1” will be settled under the Facility and trades done on “T+2” will be settled according to the regular process. Requests received after 21:00 will be processed from “T+3” day, subject to successful validation. De-registration requests will also require CC approval.
Creation of UPI Block in Favor of CC
In this article, we will explore the process of creating a UPI block in favor of CC (Clearing Corporation) and the guidelines associated with it. The creation of a UPI block involves several steps and guidelines provided by the National Payments Corporation of India (NPCI) – UPI. Let’s dive into the details:
Appointing Sponsor Banks
The CC is responsible for appointing one or more sponsor banks to integrate with the UPI platform. These sponsor banks will be provided with the virtual payment addresses (VPAs) associated with the accounts maintained by the CC.
Initiating the UPI Block Request
To provide this facility, TMs (Trading Members) must have appropriate systems in place to integrate with UPI applications. This integration allows clients to initiate a request for a UPI block in favor of the CC. The TM’s application or online portal is utilized for this purpose. TMs assign a unique reference number (refID) to each block request, following the guidelines provided by the CC. The block can be created in favor of any of the VPAs provided by the CC.
Expiry and Restrictions
The UPI block created in favor of the CC will have an expiry period of 30 years from the date of creation. Additionally, other restrictions such as the amount and number of instructions specified by NPCI-UPI or the customer’s bank will apply.
Adding the Block as Collateral
Upon successful creation of the block in the UPI system and receipt of relevant information from the respective sponsor bank, the CC adds the block as collateral. The CC informs the TM and the CM (Clearing Member) of the TM about the addition of the block using the application program interface (API) specifications provided by the CC. The TM confirms the successful creation of the block to the client. If any failures occur during block creation, the TM/CM will be informed, including appropriate response codes received from UPI/Sponsor bank.
API Mechanism for Block Status Enquiry
The CC provides an API mechanism for TM’s to query the status of the block using the unique refID. If the TM does not receive the intimation of block creation within 5 minutes, they should utilize the API to check the status.
Usage and Application of the Block
As stated in the SEBI Circular, the UPI block supports multiple debits and can be utilized for margin and settlement related obligations of the client.
Release of Blocks Not Meeting Required Conditions
In situations where the CC receives a block from non-registered accounts or if the block does not meet the required conditions (e.g., when the bank exposure limit of the CC is breached), such blocks will be released by the CC and not added to the collateral. The CC will promptly notify the TM and the CM of the TM regarding such releases.
By following these guidelines and procedures, the process of creating UPI blocks in favor of CC can be effectively implemented, ensuring secure and efficient trading operations.
Collateral Management Instructions
Collateral management is an essential aspect of financial transactions. Here are some guidelines for clients registered under this facility.
Use of Collateral
- Acceptable Forms of Collateral:
Clients registered for the facility are allowed to provide collateral only in the form of UPI blocks or group I equity shares. The CC publishes an approved list of securities for reference. - Treatment of UPI Collateral:
Collateral provided through UPI block is considered as cash-equivalent collateral and does not require any haircut.
Collateral Allocation and Calculation
- Restriction on Collateral Allocation:
CMs are not authorized to allocate any collateral to clients using the Facility. Instead, the CC calculates the value of collateral for UPI clients based on the amount of UPI block and the value of re-pledged securities. - Prudential Norms for Collateral Acceptance:
The prudential norms for acceptance of collateral for securities still apply to clients using the Facility. These clients receive benefits of re-pledged securities, subject to such norms. However, for the calculation of short allocation penalty, the full value of client collateral will be considered, even if it exceeds the prudential limits. It is important to note that TM/CM proprietary collateral follows existing practices in case of a shortfall of client collateral after considering prudential norms.
Illustration:
Let’s consider a scenario where a client has pledged stock A to an SCM, who has re-pledged it to the CC. However, the prudential limit for stock A has been exhausted, resulting in no benefit provided against re-pledged securities. Additionally, the member is not allowed to allocate collateral as the client is using the Facility. In such cases, the member will be permitted to execute trades on behalf of the client up to the extent of the UPI block plus the value of re-pledged securities. If the margin exceeds the amount of UPI block available, the excess will be blocked from the member’s proprietary collateral. While re-pledged securities cannot be used towards margin requirements, their value will be considered for calculating short allocation. If the minimum margin collection requirement does not exceed the value of the UPI block and re-pledged securities, it will not be considered as a short allocation.
Reporting Short Allocation
In the case of short allocation, members will have an opportunity to report the amount of client collateral available against segment-wise short allocation. However, this reporting is only allowed for specific reasons related to clients using the Facility. The following reason codes can be used for reporting:
- 02: Value of securities sold for which EPI has been done by end of day to CC
- 03: Trades executed in wrong client codes (Only applicable for intra-day shortfall where snapshot field is other than E)
- 05: UPI block successfully created but accepted later (Only applicable for intra-day shortfall where snapshot field is other than E)
- 06: Securities are re-pledged by CM to CC in the depository but not yet processed by CC. (Only applicable for intra-day shortfall where snapshot field is other than E)
- 08*: Credit in lieu of successful early pay-in of securities to CC
*Note: Reason code “08” is only available for clients using the Facility and is not applicable to other clients.
UPI Block Creation
Clients can create UPI blocks in favor of the CC only from their accounts with banks that are part of the approved list of banks for accepting UPI blocks. The CC actively monitors its exposure towards these banks, including the UPI block amount, in addition to other exposures. If the CC’s exposure exceeds the set limit with a particular bank, the CC will not accept any additional UPI block from the next day onwards. Any new blocks sought to be created will be released and not added to collateral.
Clarity and Transparency in Releasing UPI Blocks
Requesting the Release of UPI Blocks
Requesting the Release of UPI Blocks from CC
The Clearing Member (CM) can request the release of UPI blocks from the Clearing Corporation (CC) by utilizing the API provided by the CC. The CC will promptly validate the requests and process them accordingly.
Risk Management Requirements for UPI Block Maintenance
Adhering to Risk Management Requirements for UPI Block Maintenance
The Trading Member (TM)/Clearing Member (CM) may have risk management requirements that are more conservative than those of the CC. In such cases, upon the CM’s request, the CC will release the UPI block based on the adequacy of the clearing member’s collateral.
Assessing Client Collateral and Risk Management Procedures
Assessment of Client Collateral and Impact on Risk Management Procedures
In the existing framework, client collateral, consisting of the allocated amount and value of repledged securities, is evaluated against client margins. For clients using the Facility, client-level collateral will include the value of the UPI block and group I securities provided by the client, which are re-pledged to the CC. However, the rest of the risk management procedures will remain unchanged.
Utilizing UPI Blocks for Margin and Pay-In Requirements
Effective Utilization of UPI Blocks for Margin and Pay-In Requirements
The CC will implement appropriate systems to enable the utilization of UPI blocks for both margin requirements and pay-in activities. This ensures efficient collateral management and facilitates seamless transactions.
Ensuring clarity and transparency, the process of requesting the release of UPI blocks from the CC is straightforward and facilitated through the provided API. The CC is responsive, performing necessary validations, and processing release requests promptly. The risk management requirements for UPI block maintenance take into account the concerns of the TM/CM, ensuring adequate collateral. The assessment of client collateral, including the UPI block and repledged securities, further contributes to robust risk management procedures. Additionally, the CC’s implementation of systems for utilizing UPI blocks optimizes margin requirements and pay-in activities.
Calculation of Obligations for Clients using the Facility
Funds Obligations Calculation
Considering all the cash market positions to be settled on a net basis (e.g., normal market, SME market), a single net funds obligation will be calculated for each client.
Considering all the cash market positions to be settled on a gross basis (e.g., trade for trade securities), if any, one pay-in obligation for gross settlement and/or one pay-out obligation for gross settlement will be calculated for each direct clearing client.
If the funds obligation for net settlement is a pay-in obligation, it can be set off against the funds pay-out for gross settlement. Conversely, if the funds obligation for net settlement is a pay-out obligation, it can be set off against the funds pay-in for gross settlement.
There will be no set-off between pay-in and pay-out transactions for gross settlement.
There will be no set-off across clients who have opted for the Facility.
The STT, stamp duty, and TM charges (see para 48-50) payable by the client will also form part of the obligation. The STT, stamp duty, and TM charges shall be consolidated with the funds obligations of the client in the following order:
If the client has any pay-out due, then the STT/stamp duty/TM charges payable will be set off against the pay-out transaction of the client.
Any residual amount of STT/Stamp duty/TM charges will be added to the pay-in transaction of the client.
Thus, for each client, there can be up to one pay-in transaction and up to one pay-out transaction in the cash market segment.
Securities Obligations Calculation
The securities obligations for the clients using the Facility shall be calculated on a net or gross basis, as per the settlement procedure applicable for that security. The net settlement will involve netting of trades done by the same client in the relevant security, and there will be no set-off against clients.
Settlement of Obligations for Clients Using the Facility
Availability of UPI Blocks for Funds Pay-In
Ensuring Sufficient UPI Blocks: Clients using the Facility must ensure the availability of an adequate amount of UPI blocks, equivalent to their funds pay-in obligation. This must be done by 8:00 PM on the trade date, or as specified by the CCs (Clearing Corporations). The actual debit from the client’s account and the receipt of funds in the CC’s account will occur after 8:00 PM on the trade date.
Debiting UPI Blocks for Funds Pay-In
Debiting UPI Blocks: The CC will debit one or more UPI blocks, fully or partially, corresponding to the funds pay-in obligation of the client. This includes the STT (Securities Transaction Tax), stamp duty, and TM (Transaction) charges. The CC will instruct the relevant sponsor bank to receive the money on their behalf through the UPI system.
Early Pay-In of Securities
Ensuring Adequate Early Pay-In: Clients using the Facility must ensure the provision of sufficient early pay-in of securities using the early pay-in block functionality provided by depositories. This must be done by 8:00 PM on the trade date. On the trade date, the securities will not be debited, and the CC will receive the securities in accordance with the prevailing procedure.
Cut-Off Time for Securities Provision
Meeting the Cut-Off Time: Securities must be provided by the specified cut-off time. Any securities accepted after the cut-off will not be considered by the CC for settlement purposes. If there is a failure to provide securities through the early pay-in block mechanism by 8:00 PM, it will be treated as a short delivery. The CC will initiate the shortage handling process in such cases. Any securities provided subsequently, whether through the early pay-in block mechanism or otherwise, after the CC has initiated the shortage handling process, will be reversed to the client’s account.
Handling of Shortages in Obligations
Funds Shortage
In cases where the funds pay-in requirement, due to trades executed by clients, cannot be met through the UPI block by the cut-off time, it will be considered as part of the consolidated funds pay-in obligation of the clearing member. This includes the STT (Securities Transaction Tax) and stamp duty requirements, but excludes the TM (Transaction) charges.
Securities Shortage
If sufficient securities are not provided through the early pay-in block mechanism by the cut-off time, the CC (Clearing Corporation) will treat the securities as short delivered. In lieu of the securities, the CC will calculate a valuation debit amount. The valuation debit amount will be:
- Adjustment against the pay-out due to the client.
- Any remaining amount will be debited to the UPI block of the client, up to the available extent.
- Any residual amount will be recovered from the CM (Clearing Member).
Auction for Short-Delivered Securities
The CC will conduct an auction to purchase the securities that were short delivered. The incremental amount of the auction pay-in, over the valuation debit amount, will be recovered from the UPI block. Any residual amount will then be debited to the CM.
Shortfall Due to Account Issues
If there is a shortfall in obligations due to reasons such as account attachment or debit freeze on the customer’s account, the obligation will fall on the respective clearing member.
Obligations to be Settled by Clearing Members
CM Obligations Calculation
The clearing member (CM) obligations will be calculated based on the prevailing process. These obligations will include proprietary trading, trading by clients who do not use the Facility, and obligations on account of clients using the Facility in case of funds or securities shortage.
Pay-Out of Funds and Securities to Clients
When clients using the Facility are due a pay-out of funds, the Clearing Corporation (CC) will directly provide it to the client’s primary bank account, as maintained in the UCC database. Similarly, the CC will instruct depositories to transfer any securities pay-out to the client’s primary demat account, also maintained in the UCC database. Depositories will transfer the securities to the client’s demat account along with appropriate entries recorded in the CM/TM pool account. It’s important to note that the CM/TM will not have control over these securities at any time.
Recovery of Shortages by Members
When there is a shortage of funds, the following procedure will be followed:
Pay-Out to Client Primary Demat Account and Securities Pledge
The CC will provide a pay-out to the client’s primary demat account and instruct the depository to auto-pledge the securities to the CM’s “client unpaid securities pledgee account”.
Shortage Amount Maintenance and Settlement
The CC will maintain the shortage amount of the client. The obligation will be devolved on the TM’s CM, who will settle the same with the CC.
Additional UPI Blocking and Debit
If the client provides additional UPI blocking subsequently, the CC will debit the amount to the extent of the shortfall and provide it to the CM.
Invocation and Sale of Shares
In case the client fails to provide the amount, the CM can invoke and sell the shares. Out of the pay-out due to the client, the amount to the extent of the shortfall shall be paid to the CM who fulfilled the obligation. The remaining funds, if any, will be paid out to the client. If the sale proceeds are not sufficient to meet the shortfall, then the short amount of the client will be revised to the extent of the sale proceeds. This amount will continue to be maintained by the CC until fully recovered. Such a shortfall amount may be adjusted towards any future funds pay-out or any UPI block created in the future, and revised appropriately.
Shortfall Recovery through Margin Pledge Mechanism
Alternatively, the CM may also recover the shortfall by selling securities provided by the client through the margin pledge mechanism. CMs will use the respective client’s UCC to sell these securities. The CM will invoke the margin pledge towards the delivery obligation of the client. On invocation, the securities will be marked for early pay-in using the block mechanism in the client’s demat account. The securities will be used towards the pay-in obligation of the client. The pay-out due to the client will first be utilized towards the shortfall amount, and any residual amount, if any, will be credited to the client’s account, similar to the process described earlier.
De-Registration and Reset of Shortage Amount
If the client de-registers from the Facility, the shortage amount of the client will be reset to zero. Members should exercise caution while de-registering clients, as any outstanding UPI blocks and shortage amounts will be released.
Procedure in Case of Securities Shortage
When there is a shortage of securities, the following procedure will be followed:
Utilization of Funds Pay-Out
Funds pay-out will not be provided to the client. The amount will be utilized by the CC towards auction pay-in or valuation debit.
Retention of Funds Pay-Out
If the funds pay-out due to the client is greater than the valuation debit, the same will still be retained for utilization towards auction pay-in or square-off.
Debit from Block Amount
If the valuation debit exceeds the funds pay-out, the additional amount will be debited from the block amount of the client. In case of a shortfall, the same will be collected from the clearing member.
Auction for Short Securities
Auction will be conducted by the CC (except in cases of direct closeout) to buy the short securities.
Utilization of Auction Pay-In
Any auction pay-in, in excess of the valuation debit (due to auction success or close-out), will be debited first from any remaining pay-out due. If there is still a shortfall, it will be collected from the client’s block amount. In case the auction debit is less than the valuation price, the difference will be credited to the Core SGF.
Shortfall Collection from CM and Revision
In case of any shortfall collected from the CM, the short amount of the client will be maintained. In case any blocking is done in the future, the block will be debited to the extent of the shortfall and provided to the CM.
Illustration:
Consider a scenario when a share sold for Rs. 100 was not delivered, and the last closing price available on the settlement day was Rs. 105. In such a case, the CC will not provide the pay-out of Rs. 100 to the client and will debit Rs. 5 from the client’s block amount. If the blocked amount is insufficient, then the CC will debit this amount to the CM. The CC will then attempt to purchase the share through auction.
Releasing Client Payout that Could Not Be Credited
If, for any reason, the CC is unable to process funds payout to a client’s bank account, the payout will be withheld by the CC until the issue is resolved. The withheld payout will be kept in a designated account by the CC. Similarly, if there is an inability to process securities payout to a client’s depository account, the payout will also be withheld in the CC’s pool account. In these cases, clients are expected to rectify the account issue or request the TM to update their primary account details in the UCC database. Periodically, the CC will attempt to credit the payout to the primary account.
Release of Unutilized Blocks
In cases where a client has created a UPI block in favor of the CC but has no trading activity for a quarter, any outstanding UPI blocks will be released by the CC at the end of the quarter.
Change in CM of TM
If a TM changes their CM, the collateral allocation for the remaining UPI blocks will be migrated under the new CM. Any shortfall of obligation from the previous trading day will be settled by the old CM. Upon shifting, the residual short amount maintained for the client will be reset.
Change of Designated CC by CM
If a CM changes their designated CC, the UPI blocks will not be reassigned to the new CC. The old CC will release all UPI blocks in their favor. The CM will continue to be responsible for fulfilling any shortfall of obligation from the previous trading day. When there is a change in the designated CC, the residual short amount maintained for the client will be reset.
Trading Member Charges
Trading members have two options for collecting charges other than trade obligations, stamp duty, and STT:
Option 1: Collect the charges directly from the client.
Option 2: Utilize an optional mechanism provided by the CC to collect the charges.
The features of Option 2 are as follows:
- This mechanism is optional, and TM charges will not be debited if not specified by the TM.
- The charges will be expressed as a percentage of gross turnover, specified by the TM. The TM may modify the charges once per quarter.
- If the optional mechanism is used, the TM may request additional charges from the clients or reverse any additional charges as agreed upon.
- The charges cover brokerage fees and all other fees and levies (except STT/stamp duty) that the TM wishes to recover from the client. The CC will debit UPI blocks to cover purchase/sale obligations, STT, stamp duty, and TM charges.
- The CC will publicly disclose the charges for each TM.
- TM charges applicable to a client for a given day will be calculated and adjusted from the client’s payout or debited from the UPI block, if available. Any charges exceeding the payout or available UPI block will not be devolved to the CM of the TM. However, the funds shortage amount for the client will reflect these charges, and they may be recovered in the future except in cases of client de-registration, change of CM by TM, change of CC by CM, etc.
- TM charges will only be debited if the block amount after settling obligations is sufficient to cover the charges. Settlement of client-level obligations (trades, STT, stamp duty) takes priority over TM charges.
- TM charges collected from clients will be paid out to the CM of respective TMs along with the payout.
Disclaimer:
Estabizz Fintech compiled the material in this article using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. They ensured the completeness and correctness of the material through due diligence. When using this material, users must consult the relevant, applicable legislation. The given data may change without prior notice and does not constitute professional advice. Estabizz Fintech disclaims all liability for any results from the use of this material.
