IL&FS Securities Services (ISSL), which is in a peculiar tangle due to a fraud involving broker Allied Financial Services, declared a default in payments on Monday.

In a letter to its trading members, ISSL said it will not be able to pay them as NCC, the clearing and settlement arm of the National Stock Exchange, has not released its payment. This default will impact several high-net-worth individuals and small players who traded in equity derivatives and where ISSL was a clearing member for them.

The payment issue between ISSL and NCC involves close to ₹400 crore. ISSL has to receive that amount from Allied Financial, a task complicated by it now involving legal hurdles. ISSL had around ₹100 crore of its own cash but the balance locked up with NCC belongs to clients of other brokers, sources involved in the negotiation said.

BusinessLine had reported on July 29 that the ISSL crisis would precipitate this week as brokers sought the return of collateral placed with it. Some brokers let their derivative positions expire on July 25 so that they could get delivery of shares in lieu of their collateral. The position held by brokers is on behalf of their clients. ISSL could not deliver shares to brokers as it has no additional money to pay NCC after its collateral was used up for Allied Financial’s dues. ISSL is the clearing member responsible for trade by brokers empanelled with it and Allied was one of them.

“ISSL is unable to effect securities payout to its clients as NCC has not affected payout of securities to it,” ISSL said in its letter to brokers. “It is due to liquidity issues, leading to a shortfall in meeting fund obligations with respect to delivery settlement no. 2019007,” the letter further stated.

Brokers were facing difficulties trading in the derivative segment via ISSL as NCC had disabled its clearing membership last Thursday and Friday due to the shortfall in margin money.

Following this, the trading terminals of ISSL-linked brokers were put in square-off mode. On Monday, ISSL had to make good on entire payments to brokers and not just meet the margin shortfall.

There are 21 brokers who had approached ANMI, the brokers’ association, with complaints against ISSL. BusinessLine had reported on July 15 that currently there is no system in place for clearing corporations to distinguish between the assets of brokers and client collateral, which had caused the IL&FS fiasco.

Experts say clearing corporations cannot touch a client’s collateral when a broker or clearing member fails. ISSL and NSE did not respond to e-mail queries.

Related Topics