Revised framework for upstreaming of clients’ funds by Stock Brokers (SBs) and Clearing Members (CMs) to Clearing Corporations

The Securities and Exchange Board of India (SEBI) recently issued a circular on December 12, 2023, addressing the upstreaming of clients’ funds by Stock Brokers (SBs) and Clearing Members (CMs) to Clearing Corporations (CCs). This circular revises the framework outlined in previous circulars and aims to enhance operational efficiency while ensuring the safety of clients’ funds.

The revised framework introduces key principles for upstreaming client funds:

Principle of Upstreaming: SBs/CMs are now required to upstream all clients’ clear credit balances to CCs on an End of Day (EOD) basis in the form of cash, lien on Fixed Deposit Receipts (FDRs), or pledge of units of Mutual Fund Overnight Schemes (MFOS) created from clients’ funds.

Nomenclature and Accounts: SBs/CMs must maintain designated client bank accounts, distinguishing between Upstreaming Client Nodal Bank Account (USCNBA) and Down Streaming Client Nodal Bank Account (DSCNBA). The circular also mandates the modification of demat account categories to include a ‘Client Nodal MFOS Account.’

Upstreaming via FDRs: FDRs created from clients’ funds must adhere to specific conditions, ensuring protection and compliance with CC’s exposure norms.

Upstreaming via MFOS: SBs/CMs can now pledge units of MFOS with CCs, offering a new avenue with minimal risk transformation due to the overnight tenure and exposure to risk-free government securities.

Operational Efficiency and Compliance
To enhance operational efficiency and reduce transaction costs, CCs are directed to build mechanisms for utilizing surplus unutilized collateral and adjusting margin blocked in cash toward client fund pay-in obligations.

Eligibility and Monitoring Mechanisms
The circular introduces eligibility criteria for clients providing Bank Guarantees (BGs) as margins, specifying net worth and conditions for issuance. Additionally, monitoring mechanisms include operational guidelines, Standard Operating Procedures (SOPs), and a penalty structure for non-compliance.