Market regulator SEBI has asked stock brokers to stop creating bank guarantees by using the funds of their clients. Brokers mainly use bank guarantees to avail trading limits from clearing corporations of stock exchanges. From September, brokers will have to use their own funds to submit bank guarantees for availing trading limits.
“Currently, stock brokers, clearing members pledge clients’ funds with banks for bank guarantees to clearing corporations for higher amounts. This implicit leverage exposes the market and especially client’s funds to risks. Beginning May 01, 2023, no new bank guarantee shall be created out of clients’ funds by brokers/members,” SEBI said in a circular on Tuesday.
Bank guarantees worth thousands of crores of rupees are currently deposited by brokers, which are based on client funds.
Now all these will have to be closed by September and brokers will require higher funds of their own for higher trading limits. This also means that the leverage that most day trading and speculators got from their brokers will reduce drastically, experts said.
Further, for many years, the bank guarantee created out of client funds was like income on a float of money that brokers were allowed, but that will stop, experts said.