SEBI, the capital markets regulator, issued a circular on Tuesday announcing a ban on stock brokers and clearing members from creating new bank guarantees (BGs) using clients’ funds starting May 1, 2023, and requiring the winding down of all existing bank guarantees by September 30, 2023.

What Happened? SEBI aims to prevent any misuse of investors’ money by brokers through the circular.

SEBI stated that stock brokers or clearing members shall not create any new BGs out of clients’ funds from May 1, 2023, and they shall wind down all existing BGs created out of clients’ funds by September 30, 2023.

The framework will not apply to the proprietary funds of stockbrokers/ clearing members in any segment, and the broker’s proprietary funds deposited with clearing managers in the capacity of a client.

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SEBI has also directed stock exchanges and clearing corporations to take stock of the current position of BGs issued out of clients’ funds by brokers and monitor the wind-down to ensure the framework’s implementation without any disruption of services to clients.

Stock exchanges and clearing corporations must put in place periodic reporting mechanisms for stockbrokers and clearing members for this purpose.

SEBI has asked stock exchanges and clearing corporations to submit reports to the authority with details like the name of the stockbroker, nature of the entity, total BG amount as collateral, total BG (out of clients’ funds) as collateral, and total BG (out of proprietary funds) as collateral on a fortnightly basis, starting June 1, 2023.

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