he Securities and Exchange Board of India (Sebi) has implemented a new rule starting from May 1, 2023, that bans stock brokers and clearing members from using their clients’ funds for bank guarantees. This move aims to mitigate the potential systemic risks posed by the practice and ensure greater protection for investors’ funds. While some brokers have expressed concerns about the increased working capital requirement, this circular is a step in the right direction towards ensuring greater accountability in the securities market and protecting the interests of investors.

Brokers usually pledge their clients’ funds with banks to obtain bank guarantees for higher amounts, creating a significant disparity between their true net worth and the guarantees utilized for trading. This practice exposes the market and clients’ funds to risks, and Sebi has expressed concern over it. To address this issue, Sebi has mandated that brokers must use their own working capital to obtain greater Clearing Corporation limitations, thereby increasing their working capital demand.

This circular will only affect brokers who have the practice of pledging clients’ funds to create bank guarantees for their own use and increase the leverage and risk exposure of clients. For brokers who have already fallen in line with the recent implementations of Segregated Margin Reporting and online client-wise/segment-wise allocation of client collaterals, this circular would only be of academic interest.