SEBI tweaks SOP in case of defaults by trading, clearing members

Capital markets regulator SEBI on Friday tweaked the standard operating procedure specifying steps to be taken by stock exchanges, clearing corporations and depositories for dealing with possible defaults by trading or clearing members.

The measures are aimed at protecting the interest of non-defaulting clients of trading members (TMs) or clearing members (CMs) in the likely event of default.

The regulator, in consultation with the Market Infrastructure Institutions, has decided to modify the framework in order to provide equitable distribution of funds amongst investors, according to a circular.

Under the new framework, within 30 trading days from crystallization of balances, stock exchanges (SEs) or clearing corporations (CCs) will have to endeavour to settle the claims of maximum number of clients by way of interim measures under their supervision, prior to issuing show cause notice (SCN) for declaring the TM a defaulter.

The TM is required to be instructed to pay small investors out of available funds and own resources (movable and immovable) under the supervision of the SEs.

Further, the unencumbered deposits available with the SEs or CCs, after adjusting their dues and maintaining the minimum base capital requirement, will also be utilised for settling the credit balance of investors starting from the smallest amount.

“Such amount shall be paid in full to all such investors having credit balance up to the amount of ₹ 25 lakh, subject to availability of funds. Further, investors having credit balance of more than ₹ 25 lakh shall be paid on pro-rata basis from the remaining funds,” SEBI said.

Also, any surplus available with any SEs or CCs will be utilised for settling the credit balances of clients with respect to other SEs. Moreover, bank guarantees of the TM will be invoked and also the fixed deposit receipts will be encashed for utilisation.

According to the regulator, SEs or CC may settle such clients in tranches. For this purpose, the client balances will be netted across exchanges to arrive at the final credit balance due to such client.

The TM will have to furnish the proof of payment to the clients, to the SEs.

In this regard, the related parties of the TM will not be considered for settlement, for which the TM will have to provide an undertaking to the SEs or CC.

Further, the TM will have to provide indemnity to the SEs to make available the funds to meet any shortfall in meeting investors’ claims. Clients withdrawing their claim will have to submit unconditional withdrawal letter to the SEs.

The modified framework will come into force with immediate effect, SEBI said.