Description

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

Summary

BSE has issued requirements for clearing members to submit half-yearly internal audit reports. The audit must verify compliance with margin collection requirements, proper segregation of client funds and securities, prohibition on cash dealings, and adherence to lending/borrowing regulations. The circular provides a detailed checklist format covering key areas of verification including margins, dealing with client funds and securities, and various regulatory compliance aspects.

Key Points

  • Clearing members must conduct and submit half-yearly internal audit reports
  • Audit must cover margin collection on Consolidated Crystallized Obligation from Trading Members (TMs) and Custodial Participants (CPs)
  • Margins must be collected only in cash form for F&O and Currency segments (except physical settlement components)
  • Verification of EOD margins and peak margins collection in prescribed forms
  • Audit must confirm margin collection reported to Clearing Corporation matches actual collection
  • Client funds and securities must be segregated from proprietary accounts
  • Cash dealings with TM/CP are prohibited
  • Members cannot pledge client securities to banks/NBFCs for raising funds
  • Daily Margin Statements (DMS) must be issued to clients with proof of delivery maintained

Regulatory Changes

The circular reinforces existing regulatory requirements and provides a standardized audit format. Key regulatory references include:

  • Circular 20200710-45 regarding cash-only margin collection for F&O and Currency segments
  • Rule 8(1)(f) & 8(3)(f) of Securities Contracts (Regulation) Rules, 1957 prohibiting fund-based activities
  • Circulars 20220107-45 (January 7, 2022) and 20220922-49 (September 22, 2022) regarding money received terms
  • Requirements for client fund segregation and prohibition on unauthorized activities

Compliance Requirements

For Clearing Members:

  • Conduct half-yearly internal audit covering specified areas
  • Submit audit report to BSE as per prescribed format
  • Maintain records of margin collection from TMs/CPs
  • Ensure proper segregation of client and proprietary accounts
  • Maintain records of monies borrowed or loaned
  • Issue statement of accounts to trading members/custodial participants
  • Issue Daily Margin Statements (DMS) to clients with required details
  • Maintain proof of delivery/dispatch logs for DMS

Audit Verification Areas:

  • Margin collection compliance (cash-only for specified segments)
  • Adequacy of EOD and peak margins collected
  • Accuracy of margin reporting to Clearing Corporation
  • Segregation of client funds, securities, and commodities
  • Absence of cash dealings with TM/CP
  • Non-pledging of client securities
  • Compliance with activity restrictions
  • Prohibition on loans based on Client Bank Account/Upstreaming Account
  • Record maintenance of borrowing/lending activities

Important Dates

  • Audit period: Half-yearly basis (likely covering April-September and October-March periods)
  • Specific submission deadline: Not explicitly mentioned in the provided content

Impact Assessment

Operational Impact:

  • Clearing members must allocate resources for conducting comprehensive internal audits twice yearly
  • Enhanced documentation and record-keeping requirements
  • Need for robust systems to track margin collection, client fund segregation, and DMS issuance
  • Potential increase in compliance costs

Market Impact:

  • Strengthens investor protection through rigorous audit of clearing member activities
  • Improves transparency in margin collection and client fund handling
  • Reduces systemic risk by ensuring proper segregation of client assets
  • Enhances overall market integrity and confidence

Compliance Risk:

  • Non-compliance could result in regulatory penalties or restrictions
  • Failure to segregate client funds properly could lead to serious regulatory action
  • Inadequate margin collection could expose clearing members to financial risk

Impact Justification

Mandatory half-yearly internal audit requirement for clearing members covering critical areas of margin collection, client fund segregation, and regulatory compliance. Non-compliance could result in regulatory action.