Description

BSE mandates clearing members to submit half-yearly internal audit reports covering margin collection, client funds segregation, and compliance with regulatory requirements.

Summary

BSE requires clearing members to submit half-yearly internal audit reports verifying compliance with margin collection requirements, client fund segregation rules, and regulatory obligations. The audit covers critical areas including consolidated crystallized obligation margins, segregation of client funds and securities, prohibition on cash dealings, and restrictions on pledging client securities.

Key Points

  • Clearing members must conduct internal audits covering the half-year period
  • Audit must verify margin collection on Consolidated Crystallized Obligation in cash only (not FDRs/BGs) for F&O and Currency segments
  • Verification required for EOD margins and peak margins collected from trading members/custodial participants
  • Auditors must confirm margin collection reported to Clearing Corporation matches actual collections
  • Client funds and securities must be segregated from proprietary accounts
  • Zero cash dealings permitted with trading members/custodial participants
  • Members prohibited from pledging client securities to banks/NBFCs even with client authorization
  • Daily Margin Statements (DMS) must be issued to clients with proof of delivery maintained

Regulatory Changes

The circular reinforces existing regulations including:

  • Circular 20200710-45 regarding cash-only margin collection for Consolidated Crystallized Obligation
  • Securities Contracts (Regulation) Rules, 1957 - Rule 8(1)(f) & 8(3)(f) prohibiting fund-based activities
  • Circulars 20220107-45 and 20220922-49 regarding borrowed/loaned monies

Compliance Requirements

For Clearing Members:

  • Submit half-yearly internal audit report for the period ending September 30, 2025
  • Ensure internal auditor verifies all areas listed in the prescribed format
  • Maintain documentation for sample transactions verified
  • Report observations including sample size, non-compliance instances, percentages, and amounts involved
  • Provide management comments on auditor observations
  • Confirm segregation of client funds and securities from proprietary accounts
  • Maintain records of monies borrowed or loaned
  • Ensure Daily Margin Statements are issued to all clients with delivery proof
  • Verify that no personal financial liability activities are undertaken
  • Confirm no loan facilities are availed based on client bank accounts/upstreaming accounts

For Internal Auditors:

  • Verify compliance across 11 specified areas (Annexure format)
  • Document sample sizes and methodology
  • Report all non-compliance instances with quantification
  • Provide detailed observations and recommendations

Important Dates

  • Reporting period: Half-year ended September 30, 2025
  • Circular issue date: October 17, 2025
  • Submission deadline: Not explicitly stated in the content provided

Impact Assessment

Operational Impact:

  • High compliance burden on clearing members requiring comprehensive audit procedures
  • Need for robust internal controls and documentation systems
  • Resource allocation for internal audit function

Risk Management:

  • Enhanced oversight of margin collection practices
  • Protection of client funds through mandatory segregation
  • Prevention of fund-based activities that violate securities regulations

Market Integrity:

  • Strengthens investor protection through systematic audit of client fund handling
  • Ensures transparency in margin reporting to Clearing Corporation
  • Prevents misuse of client securities and funds

Penalties for Non-Compliance:

  • Clearing members failing to comply may face disciplinary action
  • Potential suspension or cancellation of clearing membership
  • Financial penalties as per BSE regulations

Impact Justification

Mandatory compliance requirement for all clearing members with strict reporting obligations on margin collection and client fund segregation