Sebi planning to improve investment mood

Market watchdog has proposed a slew of measures to contain risks

GN Bureau | April 20, 2013



Now, investors may breathe a little easier trading in the stock market as the new measures proposed by market watchdog Securities and Exchange Board of India (Sebi) could make the investment environment less volatile.

In a bid to boost investor confidence, the regulator has suggested various proposals including incentivising web-based trading models, reducing the settlement period from the present system of two days (T+2) to one day (T+1) to realise sale/purchase transactions and mitigating risks associated with client collateral to reduce overall risk in the system.

The proposals were put forth in a ten-page discussion paper that Sebi released on Friday.

“Sebi has from time to time put in place various risk containment measures to address the risks involved in the cash and derivatives market. But as the market is always in a dynamic state, the risk management system cannot remain static and has to constantly address the changing risk profile of the market. Sebi has prepared a discussion paper covering alternative schools of thoughts on steps that can be taken to further fine tune the risk management system,” the regulator said in a statement.

The regulator is of the view that unsettled trade transactions contribute significantly to the overall risk in the system and this problem could be resolved by adopting a shorter settlement cycle. It has thus, proposed to reduce the settlement period from two days (T+2) to one day (T+1).

At present, for example, if an investor sells shares in the stock markets, the amount is credited to his account two days after the sale of shares thus, locking up his funds for two days. However, with the T+1 system in place, the amount will be credited to the investor’s account immediately the next day after the sale so that he has funds in hand to undertake further transactions.

In addition, the regulator has observed that it is the clearing corporations (CCs) that are the most exposed to risk while trading in stock markets. CCs work with exchanges and are responsible for confirmation, delivery and settlement of transactions. Sebi has proposed to incentivise the internet-based trading (IBT) model as it does not pose additional risk to the system.

“The IBT framework followed involves checking for availability of and blocking either 100% cash in the connected bank account in case of buy orders or shares in the connected demat account in case of sell orders. Thus, risk posed by trades of such clients to the broker is zero as there is an order level check for availability of funds/securities as well as blocking of the same on execution of the trades,” according to the discussion paper.

The regulator has argued that “funds and securities of clients in IBT model are blocked in segregated accounts of clients, an arrangement for such zero risk trades with the CC may lead to potential lower costs” and has pitched in for incentivising the IBT model to attract a larger number of investors.

The discussion paper has also raised the issue of clients facing threat of losing their money due to exposure to price risks (fluctuations in share prices) and market risks (factors that affect the overall stock market). Setting aside price and market risks, on which complete control cannot be exercised, the regulator has proposed to minimize the chances of investors losing out their money following bankruptcy of brokers.

“While brokers and trading members (TMs) participate in securities market for their business, clients access securities market to invest their savings. The risk that clients face in securities market is the price risk/market risk of the securities they invest in. Market structure should (hence) be sound enough not to expose clients to other risks (operational risk, credit risk of brokers/TMs),” the regulator said.

Under the present guidelines, the regulator has “mandated segregation of client money/securities, deposited as collateral with broker/TMs, who have been directed to ensure that client collateral is only used for meeting margin requirements/pay-ins.” The regulator has proposed to further strengthen the existing system by ensuring that collaterals deposited by investors are at an arm’s length distance from the brokers.

The regulator has invited comments and other recommendations on the ten-page discussion paper from different stakeholder groups by May 20, 2013. 
 

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