Executive Summary:
SEBI issued a circular on July 1, 2020, outlining a Standard Operating Procedure (SoP) for handling Trading Member (TM) or Clearing Member (CM) defaults. This SoP aims to harmonize actions among Stock Exchanges (SEs), Clearing Corporations (CCs), and Depositories to protect non-defaulting clients. The SoP details actions to be taken upon detection of early warning signals, effective August 1, 2020. TMs must provide an undertaking empowering SEs/CCs to freeze their bank accounts within 90 days of the circular.
Key Points / Main Content:
Early Warning Mechanism and Uniform Membership Structure:
* The circular supplements the Early Warning Mechanism from the December 17, 2018 circular.
* It addresses the uniform membership structure where TMs cover client defaults to CMs, and CMs cover client TM defaults to CCs.
Standard Operating Procedure (SoP):
* The SoP is triggered by early warning signals or specific events indicating a likely TM/CM default in repaying funds/securities to clients or meeting settlement obligations (e.g., shortage of funds/securities exceeding Rs. 10 crore, failure to meet settlement obligations, increase in investor complaints).
* The Initiating Stock Exchange (ISE) takes specific actions within defined timelines, including seeking explanations from TM directors, initiating joint inspections, and potentially disabling the TM's trading terminal.
* Upon disablement, the ISE informs other SEs, CMs, and Depositories, who then take corresponding actions like disabling the TM, squaring off positions, and freezing demat accounts.
* Open positions of clients of TM must be liquidated/squared off within 15 trading days from CM's receipt of disablement information.
* Unencumbered funds/securities held by other TMs/CMs for the defaulting TM must not be alienated. CMs must invoke BGs of TM and transfer all unencumbered funds of TM on demand.
* A forensic auditor is appointed to assess the TM's assets and liabilities within 15 trading days of disablement.
* ISE provides a report to SEBI within 30 trading days of the trigger, detailing actions taken and proposed.
Actions by Depositories:
* Depositories must freeze demat accounts of the TM, suspend Power of Attorney in favor of TM, and monitor/transfer client accounts if the TM is a Depository Participant (DP).
* Depositories initiate a concurrent audit for verification of debit transfers from client accounts.
Actions by ISEs, SEs, CCs, and Banks:
* Banks are instructed to freeze the TM/CM's bank accounts for debits.
* SEs direct CCs/CMs to invoke unencumbered collateral deposits.
Other Actions:
* ISEs/SEs/CCs endeavor to restore client securities and settle claims before declaring the TM a defaulter.
* A show cause notice (SCN) is issued for declaring the TM a defaulter after finalization of assets and liabilities.
* Investor Grievance Redressal Committee (IGRC)/Arbitration meetings are suspended once the member is disabled or an SCN is issued.
General Provisions:
* The SoP also applies to likely defaults by CMs, with the CC taking action for Professional CMs.
* When an SCN is issued, subsidiaries/associate companies of the TM/CM that are members on other SE/CC segments will also be suspended.
* Default proceedings follow SE/CC bye-laws, rules, and regulations.
* TMs must provide a list of all bank accounts and an undertaking empowering SEs/CCs to freeze them.
* The SoP outlines minimum actions, and SEs/CCs/Depositories can take additional actions as needed.
* SEs, CCs and Depositories are expected to follow the timelines enumerated, reasons shall be recorded in case of any deviation in timelines prescribed.
Directives to Stock Exchanges, Clearing Corporations, and Depositories:
* Communicate the circular's provisions to members/participants and disseminate it on their websites.
* Amend bye-laws, rules, and regulations as necessary.
* Report on implementation status in their monthly development report to SEBI.
Impact Analysis:
Stock Exchanges (SEs), Clearing Corporations (CCs), and Depositories:
* Impact: Must implement the SoP, monitor TMs/CMs for early warning signals, and take timely actions to protect investors.
* Action Required: Amend bye-laws/rules, communicate the circular to members, and report implementation status to SEBI.
Trading Members (TMs) and Clearing Members (CMs):
* Impact: Subject to increased scrutiny and potential disablement if default signals are detected.
* Action Required: Provide a list of all bank accounts and an undertaking empowering SEs/CCs to freeze them within 90 days of the circular (by September 29, 2020).
Clients of TMs/CMs (Investors):
* Impact: Protected by the SoP, which aims to minimize losses in case of TM/CM default.
* Action Required: No direct action is required, but clients should be aware of the protections offered by the SoP.
Banks:
* Impact: Required to freeze bank accounts of TMs/CMs upon instruction from SEs.
* Action Required: Comply with instructions from SEs to freeze TM/CM bank accounts.
Key Entities Referenced
SEBI: Securities and Exchange Board of India, the regulatory body that issued the circular.
Stock Exchanges: Recognized Stock Exchanges which are addressees of the circular.
Clearing Corporations: Recognized Clearing Corporations which are addressees of the circular.
Depositories: Entities that hold securities, which are addressees of the circular.
Trading Member (TM): A member of a stock exchange involved in trading activities. Subject of the standard operating procedure.
Clearing Member (CM): A member of a clearing corporation responsible for clearing and settling trades. Subject of the standard operating procedure.
Standard Operating Procedure (SoP): The main subject of the circular, outlining steps to be taken in case of default by Trading Members or Clearing Members.
Securities and Exchange Board of India Act, 1992: The Act under which SEBI derives its powers to issue the circular.
CIRCULAR
SEBI/HO/MIRSD/DPIEA/CIR/P/2020/115 July 01, 2020
To
All Recognised Stock Exchanges
All Recognised Clearing Corporations
All Depositories
Madam / Sir,
Subject: Standard Operating Procedure in the cases of Trading Member /
Clearing Member leading to default
1. SEBI vide circular dated December 17, 2018 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 were also specified in the said Circular.
2. With the 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 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.
3. In order to harmonize the action amongst all SEs / CCs / Depositories in a time
bound manner this SoP has been prepared in consultation with SEs, CCs and
Depositories so as to achieve uniformity in implementation of actions. 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 untill 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.
4. 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:
a) There is shortage of funds / securities payable to the clients by Rs. 10
crore (SE may have their own criteria) and / or
b) TM / CM has failed to meet the settlement obligations to CM / CC and / or
Page 1 of 10c) There is sudden increase in the number of investor’s complaints against
the TM / CM for non-payment of funds and / or transfer of securities,
the following actions shall be taken by Initiating Stock Exchange (ISE) / SEs / CCs
and Depositories as per the timeline given below:
Sr. Action Timeline
No.
4.1 Seek documents / explanation or Meeting with Within 3 trading
designated directors of TM. days of trigger
4.2 A limited purpose joint inspection of TM shall be Within 3 trading
initiated. ISE along with other SEs shall send a team of days of the
officials for taking possession of the copy of the books meeting /
of accounts and other relevant records including but explanation with
not restricted to securities register, trial balance, client the designated
master, bank books, debtors and creditors ledger directors
(preferably in electronic mode) for the last 3 years (if
available).
4.3 a) The explanations offered by the designated Within 7 trading
director(s) of the TM shall be analysed by the ISE days of 4.2
and based on the information available, to protect
the interest of non-defaulting clients, as an interim
measure, the trading terminal of the TM may be
directed to be disabled by the Managing Director of
the ISE for reasons to be recorded in writing.
b) A preliminary assessment of assets and liabilities
of the TM shall be completed by the ISE.
4.4 ISE shall issue a notice / circular informing the Within 1 day of
disablement of the TM in all segments. disablement
4.5 ISE shall communicate the decision of disablement of Within 1 trading
the trading terminal(s) of the TM along with detailed day of
reasons for disablement to the TM and CM(s) with an disablement
advice to CM(s) to square-off open positions of TM and
its clients.
4.6 ISE shall inform the Depositories about the Within 1 trading
disablement immediately and advice Depositories to day of
freeze the demat accounts of the TM (including TM disablement
Pool Accounts). (ISE shall give specific instructions
along with PAN to the Depositories). Any debit in the
demat account of TM shall be made under supervision
of ISE.
4.7 ISE shall inform other SEs about the disablement Within 1 trading
immediately and the other SEs shall disable the said day of receipt of
TM on receipt of information and the other SEs shall intimation of
Issue a notice / circular in this regard. disablement
from ISE
4.8 TM may also stand suspended to act as a client with Within 1 trading
any other TM / CM in any other segment / SEs. day of the date
Page 2 of 10of receipt of
information of
disablement
from ISE
4.9 In case of open positions of clients / TM, CM shall Within 15
liquidate / square off the open positions. trading days
from the date of
receipt of
information by
the CM.
4.10 a) All SEs shall immediately direct other TM / CM so Within 1 trading
as not to alienate the unencumbered surplus funds day of the date
/ securities held by them for such TM registered as of receipt of
a client. information of
disablement
from ISE
b) CM shall invoke the BGs of TM and all Upon
unencumbered funds of TM to be transferred to instructions from
SE on demand. CM shall also ensure that the BG SE
do not expire in the intervening period else they
shall invoke even before the receipt of instructions
from SE.
4.11 All SEs shall inform the CM / CC regarding pay-out As and when
proceeds due to the TM which shall be credited to the payout is made
settlement account of the TM.
4.12 If the open position of clients of TM could not be Within 15
liquidated / squared off, the re-pledged securities of the trading days
client of the TM lying with the CM in the Client from the date of
Securities Margin Pledge Account and other receipt of
identifiable collateral of the client of TM such as cash / information by
Bank Guarantee (BG) / Fixed Deposit Receipts (FDR) the CM
/ Mutual Fund Units shall be taken / encashed over by
CM wherever possible in accordance with guidelines
issued in this regard from time to time.
4.13 All the securities lying in client unpaid securities Within 15
account of the TM (CUSA) shall be liquidated by CM / trading days
CC / ISE and the sale proceeds shall be credited to from receipt of
respective client’s financial ledger. In this situation information of
depository shall not levy any penalty on such disablement
transactions. from ISE
4.14 a) ISE, in consultation with SEs / CCs, shall appoint a Within 15
forensic auditor to conduct forensic audit of books trading days of
of accounts of the concerned TM. All SEs shall disablement
obtain details of the free securities / collateral
available with their respective CM and CC and
provide to the forensic auditor.
b) An assessment of assets and liabilities of the TM Within 3 weeks
shall be undertaken by the forensic auditor. The of appointment
Page 3 of 10liabilities to the clients for funds and securities shall of forensic
be established with demarcation of securities auditor
belonging to the fully paid clients or partly paid /
unpaid clients.
4.15 ISE shall also provide a report to SEBI on the reasons Within 30
for trigger, the meetings held with directors of the TM / trading days
CM and the outcomes of limited purpose inspection, from the date of
the details of actions taken and proposed to be taken trigger
under the SoP and any other information that the ISE
may deem relevant.
Action by Depositories
4.16 Depositories to freeze the demat accounts of the TM Within 1 trading
(including TM Pool Accounts). day from the
receipt of
information of
disablement
4.17 Depositories shall not allow new account opening by Within 1 trading
the DP (Defaulting TM / CM) and shall suspend all days from the
Power of Attorney in favour of the defaulting TM given date of receipt of
by its clients. information of
disablement
4.18 If the TM is also a Depository Participant (DP), the Within 3 trading
Depositories shall depute its officials / auditor to days from the
monitor the transactions in demat securities of the date of receipt of
clients of TM and / or transfer the demat accounts of information of
the clients to another DP. disablement
4.19 Depositories shall initiate concurrent audit for 100% Within 7 trading
verification of debit transfers executed from the client days from the
accounts and account closures processed by the DP. date of receipt of
information of
disablement
4.20 Depositories shall provide the details of pledges that Within 15
were invoked by Banks/ NBFCs with whom TM’s own trading days
securities were pledged in the previous 30 days to the from the date of
SE / CC. receipt of
information of
disablement
Action by ISE /SEs / CCs and Banks
4.21 Issuance of instruction to the banks that the balance in Within 1 trading
all the bank accounts of TM / CM shall be frozen for day of receipt of
debits by Banks. information of
disablement
4.22 SEs to direct CCs / CM to invoke the unencumbered Within 1 trading
collateral deposits including BGs / FDRs day from
disablement
4.23 CCs / CM shall secure the unencumbered collateral Within 1 trading
deposits, electronic balances in the depository day on receipt of
Page 4 of 10accounts of the TM / CM, including BGs as per the information of
directions received from SEs. disablement
Other actions by ISE/ SEs / CCs
4.24 With regard to the restoration of securities of clients Within 30
lying with the CM, post crystallization of balances in the trading days
financial ledger of clients by forensic auditor or as per from
the Auditor’s certificate as may be provided by crystallization of
Member: balances
ISE/ SE / CC shall endeavour to initiate the process
to settle debit balance of such client accounts by
selling their securities if such clients fail to clear
their debit balance after giving notice period for 5
days.
After reconciling the Register of Securities (ROS),
the securities of the credit balance clients (fully paid
clients) shall be restored to their respective demat
accounts.
In this regard, the related parties of the trading member
shall not be considered for settlement, for which the
TM shall provide an undertaking to the SEs / CC.
4.25 ISE / SEs / CCs shall endeavour to settle the claims of Within 30
maximum number of clients by way of interim trading days
measures, under their supervision prior to issuing from
show cause notice (SCN) for declaring the TM a crystallization of
defaulter. The TM shall be instructed to pay small balances
investors out of available funds and own resources
(movable and immovable) under the supervision of the
ISE / SEs.
Further, the unencumbered deposits available with the
SEs / CCs, after adjusting for any dues of the SE / CC
and maintaining the minimum BMC, shall also be
utilised for settling the credit balance of investors
starting from the smallest amount. Also any surplus
available with any SEs / CCs, shall be utilised for
settling the credit balances of clients with respect to
other SEs. BGs of the TM shall be invoked and also
the FDRs shall be encashed for utilisation. SEs / CC
may settle such clients in tranches.
For this purpose, the balances of client will be netted
across exchanges to arrive at the final credit balance
due to such client.
The TM shall furnish the proof of payment to the
clients, to the SEs.
Page 5 of 10In this regard, the related parties of the TM shall not be
considered for settlement, for which the TM shall
provide an undertaking to the SEs / CC. TM to provide
indemnity to the SEs to make available the funds to
meet any shortfall in meeting investor’s claim (other
than those who have withdrawn their claim). Clients
withdrawing their claim will have to submit
unconditional withdrawal letter to the SEs.
4.26 Issuance of SCN for declaration of TM as a defaulter After finalization
and the list of members to whom the notice is issued of assets and
shall be placed on the website of the SE and on such liabilities as per
other place, as the relevant authority may deem fit. forensic audit or
audit by SEs
4.27 SEs shall intimate the clients about the issuance of the Within 3 trading
notice / SCN to declare the TM as defaulter including days of the
through email / SMS. issuance of SCN
5. The above action 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.
6. 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 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
member(s) on other segment / SE / CC shall also be put in suspension mode. All
their open positions shall be squared off and their assets shall be frozen.
7. Once the Member is disabled or SCN is issued for declaration of defaulter to TM /
CM (whichever is earlier), no further Investor Grievance Redressal Committee
(IGRC) / Arbitration meetings shall be conducted.
8. 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 record. SEs shall not expel
the TM immediately until the default proceedings are completed.
9. 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 draft of
undertaking is enclosed at Annexure A.
10. The above SoP enumerates the minimum action which shall be initiated by the
respective SEs / CCs / Depositories in accordance with law with effect from August
01, 2020. However, the respective SEs / CCs / Depositories are free to initiate any
other actions as may be necessary in compliance with their bye laws / rules /
regulations and / or to protect the interest of investors. The ISE / SEs/ CCs and
Page 6 of 10Depositories are expected to follow the timelines with respect to each actions as
enumerated, reasons shall be recorded in case of for any deviation in timelines
prescribed.
11. Stock Exchanges, Clearing Corporations and Depositories are directed to:
a) 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;
b) make necessary amendments to their bye-laws, rules, regulations as
may be necessary;
c) communicate to SEBI, the status of the implementation of the provisions
of this circular in their monthly development report.
12. This circular is being issued in exercise of the powers conferred under Section 11
(1) of the Securities and Exchange Board of India Act, 1992 read with Section 10
of the Securities Contracts (Regulation) Act, 1956 and Section 19 of the
Depositories Act to protect the interests of investors in securities and to promote
the development of, and to regulate the securities market.
Yours faithfully,
Rachna Anand
General Manager
Market Intermediaries Regulation and Supervision Department
Encl: Annexure A
Page 7 of 10Annexure A
To be on Stamp / Franked Paper of appropriate value and notarized
AFFIDAVIT OF UNDERTAKING CUM INDEMNITY BOND TO BE SUBMITTED
BY MEMBER TO ………… [NAME OF THE STOCK EXCHANGE / CLEARING
CORPORATION]
This Undertaking cum Indemnity Bond is signed at Mumbai on this ________day
of _______, 20.
By
I/We, Member of ……….. [Name of The Stock Exchange / Clearing
Corporation] (bearing Trading / Clearing No. ________), having office at
…………………………………………………, (hereinafter referred to as “Member”,
which expression, unless repugnant to the context or meaning thereof, shall be
deemed to include its successors and assigns).
In favour of:
………………..Ltd., [Name of the Stock Exchange / Clearing Corporation] a
company incorporated under the Companies Act, 1956 having its registered office
at ………………………………………………… (hereinafter referred to as “…..”,
which expression shall, unless repugnant to the context or meaning thereof, be
deemed to include its successors and assigns).
I/We hereby solemnly declare and undertake that:
Whereas the Securities and Exchange Board of India (hereinafter referred to as
“SEBI”) has issued circular dated July 01, 2020 on Standard Operating Procedure
to be followed in the case of trading member/clearing member leading to default
(hereinafter referred to as the “said circular”).
Whereas in terms of the said circular the …….. [Name of the Stock Exchange /
Clearing Corporation] has amended its bye-laws and is empowered …….. [Name
of the Stock Exchange / Clearing Corporation] to issue instructions to the
concerned bank/s to freeze the bank account/s maintained by the Member, for all
debits / withdrawal by the Member in the event of a potential default by the Member
in meeting its obligations to Stock Exchange / Clearing Member / Clearing
Corporation and / or repayment of funds / securities to his / its clients.
Page 8 of 10Now, in consideration of the above, I / We do hereby agree and confirm
unconditionally to undertake that:
1) ………… [Name of the Stock Exchange / Clearing Corporation] is empowered
to instruct the concerned banks to freeze my / our bank accounts for all debits
/ withdrawals from such accounts. The details of bank accounts held by me/ us
are as follows:
2) Any debits to such bank account, post freezing by the banks, shall be done only
on the express instructions to the said banks by ………… [Name of the Stock
Exchange/ Clearing Corporation].
3) ………… [Name of the Stock Exchange / Clearing Corporation] shall not be
liable in any way to me/us for any losses, claims, penalties, proceedings /
actions, damages, consequential or otherwise, arising there from or occasioned
thereby.
4) No proceeding/suit/action/claims would be adopted by me/us against …………
[Name of the Stock Exchange/ Clearing Corporation] for any act done with
respect to issuance of instruction to the bank/s mentioned above for freezing of
my/our account/s held with the bank/s.
5) I / We agree to indemnify and keep ………… [Name of the Stock Exchange/
Clearing Corporation] and/or its successors/assigns indemnified from time to
time, and at all times hereafter, against all claims, demands, damages,
liabilities, proceedings, losses, actions, charges and expenses made or
suffered or incurred or caused or likely to suffer / incur directly or indirectly, to
………… [Name of the Stock Exchange/ Clearing Corporation] and/or its
successors/assigns on account of freezing of my/our account/s held with
bank/s.
6) I/ We shall keep the Bank appropriately notified of the obligations undertaken
by me / us herein and authorizing them to honour the instructions from …………
[Name of the Stock Exchange / Clearing Corporation].
7) I / We undertake that a revised Undertaking cum Indemnity Bond shall be
submitted by me / us to ………… [Name of the Stock Exchange / Clearing
Corporation] within seven working days of opening of any new bank account or
change in details of any existing bank account,
8) This Undertaking cum Indemnity Bond shall be binding on my / our successors,
legal representatives and assigns.
9) I / We warrant that representations made by the undersigned / on behalf of the
Member are true and correct.
Page 9 of 10IN WITNESS WHEREOF, I/We hereby execute this Undertaking cum Indemnity Bond
on the day, month and year above written.
Solemnly declared at )
this ___ day of ______, 20 ) BEFORE ME
(Name of Designated Director)
(Name of Trading Member)
(with rubber stamp & SEBI Registration No.)
In the presence of:
1.
2.
Note: Board Resolution for execution of the said undertaking cum indemnity and
authorization for signing the same should be enclosed alongwith the document.
Page 10 of 10