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Sebi bans brokers from creating bank guarantees on clients’ funds
Capital markets regulator Sebi on Tuesday prohibited stock brokers and clearing members from creating new bank guarantees on clients' funds beginning May 1 and directed them to wind down all existing bank guarantees by September-end.
This is part of Sebi's effort to curb the possible misuse of investors' money by stock brokers.
At present, stock brokers (SBs) and 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.
"Beginning May 1, 2023, no new BGs shall be created out of clients' funds by SBs/CMs. Existing BGs created out of clients' funds shall be wound down by September 30, 2023," Sebi said in a circular.
The framework will not be applicable for proprietary funds of stock brokers and clearing members in any segment and SB's proprietary funds deposited with CM in the capacity of a client.
In addition, the