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The Reserve Bank of India has cautioned against the use of collateral for purposes other than those it is intended for, by the clearing member, as the securities are transferred into an omnibus account.
In its Financial Stability Report, the RBI outlined the need to monitor these aspects and take corrective actions in case of gaps, as this would be construed as illegal or fraudulent use of collateral.
The RBI observed that the extant regulatory framework required the clearing member/broker to maintain records of collateral transfers from a client and this was subject to inspection by SEBI/stock exchanges.
The RBI further observed that re-use of collateral received for further borrowing by any entity is not possible in India, as the regulatory framework required the clearing member to use it only for the purpose of meeting collateral requirements of the client, and not as collateral for his own or any other client’s account. Hence, the risks of re-hypothecation/re-pledging, as highlighted in the International Organisation of Securities Commissions (IOSCO) Risk Outlook 2014-15 are not significant in the Indian context, RBI said.
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