Brokers Can't Keep Surplus Funds Of Clients As New Rules Kick In

Starting Oct. 7, brokers will have to return surplus funds to bank accounts of their clients on the first Friday of a month or a quarter, increasing safety for investors but also reducing working capital for brokerages.

The Securities and Exchange Board of India, in a June 2021 circular, directed trading members to settle surplus funds, after considering end-of-the-day obligation, on the first Friday of the quarter for all clients. For those who have opted for monthly settlement, it should be done on the first Friday of the month. The rule comes into effect on Oct. 7.

According to Nithin Kamath, founder and chief executive officer at Zerodha, the amount involved across the industry will be more than Rs 25,000 crore.

While the new account settlement process is good for customer safety, the broking industry will have a few issues to manage, Kamath tweeted.

“There will be operational risk of sending large amounts in one single day, much higher working capital requirement, especially on Monday after account settlement, and a hit on float income.”

Kamath said brokers will require higher working capital. Payment gateways clear client funds transferred to brokers on a T+1 basis, or the day after the trade, according to Kamath.

For a customer to trade instantly on these funds, the broker's own capital will be blocked, he said. In this case, the broker will get the funds only on the Monday after account settlement.

The measure could prompt brokerages to consider increasing rates.

“If I were to bet,” Kamath said, “I'd say there will be upward pressure on brokerage rates over the next few years due to all the regulatory changes.”