The framework aims to further reduce the risk for client securities, particularly those provided for delivery obligations.
A new framework was put in place by capital markets regulator Sebi on Monday to stop stock brokers from misusing their clients' securities and money.
According to the framework, depositories are required to compare obligations received from the clearing corporations to the transfer instructions for paying in securities from client demat accounts to trading member pool accounts.
This should be done prior to executing actual transfer of the securities for pay-in from client demat account to trading member (TM) pool account, the Securities and Exchange Board of India (Sebi) said in a circular.
The framework, applicable from November 25, is aimed at further mitigating the risk for clients' securities, especially those given towards delivery/settlement obligations.
"Depositories, prior to executing actual transfer of the securities for pay-in from client demat account to TM Pool account, shall validate the transfer instruction received through any of the available channels for the purpose of pay-in, i.e. either initiated by clients themselves or by the Power of Attorney (POA) / Demat Debit and Pledge Instruction (DDPI) holder against the client-wise net delivery obligation received from CCs," Sebi said.
For early pay-in transactions, the existing facility of block mechanism will continue.
Under the pay-in of securities, shares that the client wants to offload are picked up from their demat account and transferred to the broker's account and all these shares are then delivered to the clearing corporation (CC).
Shares that the client wishes to purchase are obtained from the clearing corporation and then transferred to the broker's account in the case of pay-out of securities. The client's demat account reflects this.
The depositories must establish a procedure for verifying the pay-in instructions.
Depositories receive the debit instruction for pay-in under the process, which can be provided by the client directly using the depository's online system or eDIS mandate, or by a depository participant based on a physical DIS (Delivery Instruction Slip) or digitally signed DIS provided by the client or POA.
On T-day, Clearing Corporations (CCs) must give the depositories client-specific net delivery obligations.
Based on the obligation data provided by CCs, depositories will have to validate the depository transfer instruction details with CC obligation details based on trading member ID, quantity, settlement details etc.
If all of the details match, the depositories will carry out the instructions, debiting the client's demat account and crediting the linked TM pool account with the relevant securities on or before the settlement day. Such transfer instructions will be rejected by the depositories in the event of discrepancies.
In order to safeguard clients' funds and securities and to make sure that the stock broker separates them and does not use them for self- or other clients' use, the markets regulator has issued a number of frameworks.
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