Sebi creates an ASBA-like mechanism for secondary market trading.

In an attempt to safeguard investors’ money from misuse and default by stock brokers, SEBI on Monday developed an alternative mechanism for trading in the secondary market based on frozen funds in an investor’s bank account, rather than providing them beforehand to the trading member. This is similar to an existing primary market feature known as Application Supported by Blocked Amount (ASBA), which ensures that an investor’s money are transmitted only when an allotment occurs.

In an attempt to safeguard investors’ money from misuse and default by stock brokers, SEBI on Monday developed an alternative mechanism for trading in the secondary market based on frozen funds in an investor’s bank account, rather than providing them beforehand to the trading member. This is similar to an existing primary market feature known as Application Supported by Blocked Amount (ASBA), which ensures that an investor’s money are transmitted only when an allotment occurs.

The new facility would be active on January 1, 2024, according to a circular issued by the Securities and Exchange Board of India (Sebi).

Money will remain in the client’s account but will be blocked in favor of the Clearing Corporation (CC) until the block mandate expires, the block is released by the CC, or the block is debited for obligations deriving from the client’s trading activity, whichever happens first.

Furthermore, the CC will manage money and securities settlement, avoiding the need for the member to handle client cash and securities.

The approach guards against misuse, broker default, and eventual capital risk.

Even if originally treated as collateral, a UPI block would be available for settlement. Clients who want to block lump sum payments may have their blocks debited many times for settlement needs spaced out over days, depending on available balance.

The facility will be made accessible by combining the “UPI block facility” secondary market trading and settlement method with the RBI-approved Unified Payments Interface (UPI) necessary service of single-block-and-multiple-debits.

The credit will initially be available in the equity cash category. The CCs may eventually extend the facility to include more areas.

When explaining the new framework’s features, SEBI said that both investors and stock brokers would be able to utilize it. As an investor is authorised to keep trading accounts with many stock brokers, he or she may choose to employ UPI block capability with some and non-UPI based trading with others.

As a result, the members would need less operational capital.

The new structure would eliminate the custody risk associated with client collateral, which would now be held by members rather than the clearing organization.

Furthermore, even if a member or another client defaults, there will be no negative consequences on client payments.

CCs would also create complete operational instructions, including the manner of brokerage collection, in coordination with relevant parties such as stock exchanges and depositories, among others.

This follows the SEBI  board’s approval of a proposal in this regard in March of this year. The agency has previously made a paper available for public comment on the subject.

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Team, Estabizz Fintech