The Securities and Exchange Board of India (SEBI) made a block mechanism on Tuesday that would allow investors to trade or invest in the secondary market without having to deal with brokers.
The investor can earn interest on the money that is currently being transferred to the stockbroker because it will remain in their bank account. Brokers’ liquidity will also be reduced as a result of the move, which could affect revenue and necessitate more working capital. This is due to the brokerage firm receiving interest income from the trading account’s idle balance.
Customers will be able to freeze funds in their bank accounts if regulators combine the Unified Payments Interface (UPI) authorization service for multiple debits of a single block with a secondary market, providing a block mechanism similar to a securities pledge mechanism. Secondary market transactions make use of the funds. This will be distinct from the current procedure, which involves transferring funds to trading members in advance.
Currently, investors and clients post collateral with their stockbroker before executing trades and settling funds and securities through their stockbroker on the crystallization of settlement obligations.
Funds should remain in the client’s account under the proposed model. Nevertheless, the Clearing Corporation (CC) will keep them frozen until either the freeze authorization expires or the freeze is released, whichever comes first. CC is able to take money out of customer accounts up to the amount in the block.
Additionally, although UPI blocks are created as collateral, they can also be used for settlement. Customers who prefer a one-time hold on an amount can have their hold debited multiple times for settlement obligations spread out over multiple days, depending on the available balance. There are two benefits to this: First, it eliminates the need to send money to a broker, and second, frozen savings account money can earn investor’s interest.
Without relying on broker reporting or allocation, this will assist in the creation of an independent and dependable identification of CC usable cash collateral ownership. The risk of mixed client funds will be eliminated by settling directly with CC rather than through an intermediary’s collection account.
“Under the UPI block facility, stock brokers do not need to assign any collateral to their clients because CC will maintain and update client collateral value based on blocking information received directly from NPCI’s UPI railroad through CC’s sponsor bank.” Stockbrokers will save money on compliance costs as a result. The consultation paper stated that subsequent procedures like the allocation of proprietary collateral, validation of 50:50 cash collateral, and risk mitigation mode monitoring would not change.