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New account settlement system from October 1: what changes

The market regulator mandates stockbrokers to settle i.e., transfer the available credit balance from trading account to bank account, at least once in a quarter (90 days) or 30 days. What changes under the new guidelines?

The logo of the Securities and Exchange Board of India is seen on the facade of its headquarters building in Mumbai. (Reuters Photo/File)

Beginning October 1, the new account settlement system for the stock broking industry will kick in. Under the new guidelines issued by the Securities and Exchange Board of India (SEBI) in July and effective from October 1, the trading members will have to settle the accounts on a monthly or quarterly basis on the first Friday of the month or quarter.

What is settlement of accounts?

The market regulator mandates stockbrokers to settle i.e., transfer the available credit balance from trading account to bank account, at least once in a quarter (90 days) or 30 days. The process of transferring the unutilised funds back into the bank account is called ‘Running Account Settlement’ or ‘Quarterly Settlement of Funds’ and the funds are transferred back to the primary bank account of the customer that is linked to the trading account.

As per the latest guidelines, the settlement will now be done on the first Friday of the quarter or the month depending upon the option selected by the customer.

What are SEBI’s new settlement guidelines?

On July 27, market regulator SEBI issued new guidelines on running accounts of client funds and securities lying with the broker. As per the new guidelines, with effect from October 1, 2022, the settlement of running account of clients’ funds will be done by the trading members after considering the end of the day (EOD) obligation of funds as on the date of settlement across all the exchanges on the first Friday of the quarter (i.e., Apr-Jun, Jul-Sep, Oct-Dec, Jan–Mar) for all the clients. It further said that if the first Friday of the quarter is a trading holiday, then “such settlement shall happen on the previous trading day”.

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In cases where the client has opted for a monthly settlement process, then the running account shall be settled on the first Friday of every month.

Why are market participants concerned?

October 7 will be the first Friday when the new system will become operational. As it will be the first Friday for the industry, brokers are anxious as they feel that bunching of all settlements on one day (as against individual settlement dates for different clients in 30 or 90 days) may create challenges for the industry as a whole.

“Brokers will have to organise cash which could otherwise be in their working capital. It will also lead to a decline in volumes in the following trading session as clients will have to transfer funds from their bank accounts to their trading accounts in order to trade,” said the head of a leading financial services firm.

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How will it impact investors and traders?

Changes in settlement brought in by SEBI over the last few years have had the aim of protecting the investor and preventing the misuse as money lying in trading accounts of investors for long periods.

SEBI’s move will give certainty to investors and trading members.

Industry experts say that it will help brokers develop a system just like banks, which credit interest in the accounts of their customers at the end of the quarter.

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Another advantage would be that if a customer has more than one demat account with different brokers, having one settlement date for the entire industry will make it easier for her to keep track of her funds in all accounts as they would all get settled on the same day.

First published on: 23-09-2022 at 12:57:26 am
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