Sebi tightens norms for qualified stock  brokers

In December, Sebi chairperson Madhabi Puri Buch had said, “In order to mitigate the concentration risk what is proposed is that on the basis of some very transparent criteria, certain brokers will be identified or designated as Qualified Stock Brokers”.

This will essentially apply to the large 10-12 broking houses. While these broking firms will be designated as QSBs, they will also face higher compliance requirements, the regulator had clarified earlier.

The parameters to designate a stock broker as a QSB will include the total number of active clients of the stock broker,the available total assets of the clients with the stock brokers, the trading volumes and the end of day margin obligation of all clients. Sebi’s circular said it is imperative for such stock brokers to provide satisfactory services to investors and resolve complaints.

Adding that the failure of such stock brokers has the potential to cause disruption in the services they provide to large number of investors causing disruption in securities market.

The parameters to designate a stock broker as a QSB will include the total number of active clients of the stock broker,the available total assets of the clients with the stock brokers, the trading volumes and the end of day margin obligation of all clients.

Sebi stated that the Board of Directors (BoD) or analogous body of QSBs shall exercise oversight over incidents/vulnerabilities having an impact on functioning of the QSB in the securities market and investor protection including data security breaches that can affect investor data.

Sebi stated that the audit committee set up by the board of the QSB shall receive information regarding the financial status of the entity, disclosure of any related party transactions, inter-corporate loans and investments, internal financial controls and risk management systems, compliance with listing and other legal requirements relating to financial statements, adherence to regulatory provisions, etc. from the Chief Financial Officer (CFO) or a analogous person of the QSB.

More importantly, in regard to the surveillance of the client behaviour the risk management framework shall be outlined comprising measures for carrying out surveillance of client behaviour through analyzing the pattern of trading done by clients, detection of any unusual activity being done by such clients, reporting the same to stock exchanges and taking necessary measures to prevent any kind of fraudulent activity in the market in terms of the regulatory requirements prescribed by SEBI and MIIs, the regulator said in its 13-page circular.

Furthermore, the QSBs shall be subjected to enhanced monitoring and surveillance including additional submissions to be made to Market Infrastructure Institutions/SEBI, as and when sought.

Stock Exchanges, in consultation with SEBI, shall carry out annual inspection of QSBs and communicate the findings of such inspection along with action taken report to SEBI,the circular said.