SEBI notifies on SoP for Trading Member/Clearing Member leading to Default [Read Circular]

SEBI - SoP - Clearing Member - Trading Member - Taxscan

The Securities Exchange Board of India (SEBI) has notified on Standard Operating Procedure (SoP) in cases of Trading Member/Clearing Member leading to default.

SEBI had specified Early Warning Mechanism to prevent diversion of client’s securities and consequential action(s) to be initiated by the Stock Exchanges (SEs), Clearing Corporations (CCs), and Depositories.

Introduction of uniform membership structure of Trading Member (TM) and Clearing Member (CM) across all segments, the TM shall make good the default of its clients to the CM and the CM shall make good the default of its clients / TM to the CC. The default of TM may not necessarily lead to the default of CM if the CM continues to fulfill the settlement obligation with the CC. To protect the interest of non-defaulting clients of a TM and /or non-defaulting clients/ TM(s) of the CM, in the likely event of default by TM / CM, there is a need for Standard Operating Procedure  (SoP)  enumerating the steps to be taken by the  SEs  /  CCs  / Depositories in such cases where SE / CC is of the view that TM / CM is likely to default in repayment of funds or securities to its clients.

The SoP lays down the actions to be initiated by the SEs / CCs / Depositories within a time frame after detection of the early warning signals as laid out in the Circular dated December 17, 2018, and other triggers as laid down in this circular until the declaration of defaulter of TM / CM by the SE / CC. Once the TM is declared defaulter, the proceedings shall be in compliance with the bye-laws, rules, and regulations of SE / CC respectively.

On analysis of early warning signals or any of the following triggers, if the SE / CC is  of  the  view  that  the  TM  /  CM  is  likely  to  default  in  the  repayment  of funds/securities to its clients and/or fail to meet the settlement obligations to CM / CC, where There is a shortage  of funds/securities payable  to  the  clients  by Rs. 10 crore (SE may have their own criteria) and/or TM / CM has failed to meet the settlement obligations to CM / CC and/or There is a sudden increase in the number of investor’s complaints against the TM / CM for non-payment of funds and/or transfer of securities

There are actions to be carried out by the Initiating Stock Exchange (ISE) / SEs / CCs and Depositories as per the timeline given in the circular. They shall equally apply to a likely event of default by a CM who is also a TM. However, in case of likely default of a Professional CM, the action to be initiated by the CM shall fall upon the CC. As soon as TM is disabled that information shall be shared by ISE with all SEs / CCs.  On receipt of such information, respective  SE  shall also conduct their due diligence and may initiate an action of disablement by issuing reasoned order by MD of SE concern. However, when SCN has been issued for declaring a TM / CM as a  defaulter by any  SE,  its subsidiary/associate companies which are also a member(s) on another segment / SE / CC shall also be put in suspension mode. All their open positions shall be squared off and their assets shall be frozen. Once the Member is disabled or SCN is issued for declaration of the defaulter to TM / CM (whichever is earlier), no further Investor Grievance Redressal  Committee (IGRC) / Arbitration meetings shall be conducted. Default proceedings shall take place as per bye-laws/rules/ regulations of the SE / CC. If the member is also a DP, Depositories shall take action as per its bye-laws for termination/transfer of its participant-ship based on the record. SEs shall not expel the TM immediately until the default proceedings are completed. The TM shall provide a list of all its bank accounts to the SEs /CCs and the SEs / CCs shall obtain an undertaking from the  TM  within  90  days from the date of issuance of this Circular, undertaking that the SEs / CCs shall be empowered to instruct the bank(s) of the TM to freeze the bank account(s)for debits.

The  SoP enumerates the minimum action which shall be initiated by the respective SEs / CCs / Depositories in accordance with the law with effect from August 01, 2020. However, the respective SEs / CCs / Depositories are free to initiate any other actions as may be necessary for compliance with their bye-laws/rules/regulations and/or to protect the interest of investors. The ISE / SEs/ CCs and Depositories are expected to follow the timelines with respect to each action as enumerated, reasons shall be recorded in case of any deviation in timelines prescribed.

Further, Stock Exchanges, Clearing Corporations, and Depositories are directed to bring the provisions of this circular to the notice of their members and participants, as the case may be, and also disseminate the same on their websites and make necessary amendments to their bye-laws, rules, regulations as may be necessary and also communicate to SEBI, the status of the implementation of the provisions of this circular in their monthly development report.

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