Concerns of futures industry body
The FIA said the proposed framework should be based on the actual risks faced by brokers and should not include risks that are already addressed through existing safeguards such as upfront margins, collateral controls and upstreaming of client funds.
SEBI had proposed to link the variable net worth requirements of brokers to the scale and riskiness of their operations based on metrics such as total client funds, number of active clients and clients linked through authorized persons (APs). Along with the average client credit balance, the regulator proposed an additional net worth requirement of ₹50 lakh for brokers with 10,000-50,000 active clients and ₹50 lakh for every additional 50,000 clients. For customers acquired through AP, the requirement will range from ₹5 lakh for up to 2,500 customers to ₹50 lakh for every additional 10,000 customers beyond the initial limit.
The markets regulator has said the changes are intended to serve as a “second line of defence”, ensuring brokers maintain sufficient capital to cover risks not addressed through margin requirements.
However, the FIA said the increase in net worth requirements based on client deposits could result in capital being held against risks that have already been substantially mitigated or removed from brokers’ balance sheets. “It may also have the effect of penalizing brokers for maintaining or encouraging high client collateral buffers, even if those buffers strengthen default flexibilities,” the association said.
The body also argued that the proposal risks mixing customer-related risk with proprietary trading risk, even though the two are conceptually different. “If proprietary trading risk is a relevant regulatory concern, it should be addressed and calibrated directly in the context of the broker’s proprietary exposure, rather than through proxies such as client deposits or client count,” the FIA said.
SEBI introduced the Variable Net-Worth Framework in 2022, under which brokers will be required to maintain capital equal to 10 per cent of the average daily cash balance received from clients in the last six months.
However, the FIA noted that the framework has become less effective following the implementation of the upstreaming mechanism, whereby client funds are transferred to the clearing corporation, leaving brokers with minimum client cash balances.
Recognizing that India’s framework minimizes the risk of client assets being exposed to broker insolvency, the FIA said any revised capital requirement should be carefully calibrated to reflect the actual residual risks borne by brokers.
The association warned that higher capital requirements could ultimately be passed on to investors through increased trading costs and have an undue influence on smaller intermediaries. Instead it suggested targeted measures such as enhanced concentration margins for large or correlated positions and explicit capital-linked limits on proprietary trading activity.
Proposed parameters for net worth
Average credit balance: 10% of the average credit balance of all customers for the last six months across all segments/exchanges
Number of active customers: ₹50 lakh if the broker has between 10,000-50,000 active clients; Additional ₹50 lakh for next 50,000 active customers
Customers through Authorized Persons (AP): ₹5 lakh for up to 2,500 customers, ₹25 lakh for up to 10,000 customers, and ₹50 lakh for every additional 10,000 active customers
