CIRCULAR
SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2023/061 April 25, 2023
To,
Stock Brokers through recognized Stock Exchanges
Clearing Members through recognized Clearing Corporations
Dear Sir/Madam,
Subject: Bank Guarantees (BGs) created out of clients’ funds
1. Currently Stock Brokers (SBs)/ Clearing Members (CMs) pledge client's funds with
Banks which in turn issue Bank Guarantees (BGs) to clearing corporations for
higher amounts. This implicit leverage exposes the market and especially the
client's funds to risks. Pursuant to discussions with various stakeholders, it has
been decided to implement the following measures in order to safeguard the
interests of the investors: -
a. Beginning May 01, 2023, no new BGs shall be created out of clients’ funds by
SBs/CMs.
b. Existing BGs created out of clients’ funds shall be wound down by September
30, 2023.
2. The provisions of this framework shall not be applicable for proprietary funds of
SBs/CMs in any segment and SB’s proprietary funds deposited with CM in the
capacity of a client.
Monitoring and reporting:
3. The stock exchanges and clearing corporations shall take stock of the current
position of the BGs issued out of clients’ funds by SBs/CMs and monitor the wind
down to ensure implementation of the circular without any disruption of services to
clients. For the purpose, stock exchanges and clearing corporations shall put in
place periodic reporting mechanisms for SBs/CMs.
4. Stock exchanges and clearing corporations are directed to submit the following
data to SEBI on fortnightly basis (starting from June 01, 2023):
Page 1 of 3
Collateral data as on <Date> at <Name of the clearing corporation>
Name of the Nature of the Total BG Total BG Total BG
SB/CM entity amount as amount (out of amount (out
(SB/CM/SCM) collateral clients’ funds) of prop funds)
as collateral as collateral
5. SBs/CMs shall be required to provide a certificate, by its statutory auditor
confirming the implementation of this circular. Such a certificate shall be submitted
to stock exchanges/clearing corporations by October 16, 2023.
6. Stock exchanges and clearing corporations shall verify the compliance of the
provisions of the circular in their periodic inspections/reporting. They shall also
evolve adequate mechanisms to address cases of SBs/CMs who do not comply
with the provisions of the circular by the stipulated dates.
7. Given the implementation of the above measures, the provisions of following SEBI
circulars shall stand modified to the extent as stated hereinabove:
a. SEBI circular MRD/DoP/SE/CIR-11/2008 dated April 17, 2008 on ‘Collateral
deposited by clients with SBs’;
b. SEBI circular MIRSD/ SE /Cir-19/2009 dated December 03, 2009 on ‘Dealings
between a client and a stock broker’;
c. SEBI circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26,
2016 on ‘Enhanced supervision of stock brokers/depository participants’;
d. SEBI circular no. SEBI/HO/MIRSD/DOP/CIR/P/2020/28 dated February
25,2020 on ‘Margin obligations to be given by way of pledge/ re-pledge in the
depository System’;
e. SEBI circular SEBI/HO/MIRSD/DPIEA/CIR/P/2020/115 dated July 01,2020 on
‘Standard Operating Procedure in the cases of Trading Member / Clearing
Member leading to default’; and
f. SEBI circular SEBI/HO/MRD2_DCAP/CIR/2021/0598 dated July 20,2021 on
‘Segregation and monitoring of collateral at client level’.
Page 2 of 3
8. The stock exchanges and clearing corporations are directed to:
a. bring the provisions of this circular to the notice of stock brokers and clearing
members, as the case may be, and also disseminate the same on their
websites;
b. make amendments to the relevant bye-laws, rules and regulations for the
implementation of the above provisions;
c. communicate to SEBI, the status of the implementation of the provisions of this
circular in their monthly development report.
9. This circular is issued in exercise of powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act, 1992, to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities markets.
Yours faithfully,
Aradhana Verma
General Manager
Tel.No: 022 26449633
aradhanad@sebi.gov.in
Page 3 of 3