Sebi proposes new formula for brokers' variable net worth

New Delhi, Apr 24 (PTI) Markets regulator Sebi on Friday proposed a revised methodology for calculating the variable net worth of stock brokers, linking it to client balances and the number of active clients, in a bid to better align capital requirements with operational risks.
     The proposal comes in the wake of the upstreaming framework under which brokers are required to transfer clients' funds to clearing corporations, leaving minimal balances with them and rendering the existing formula less effective.
     Under the current rules, introduced through the 2022 amendment to stock broker regulations, variable net worth is calculated as 10 per cent of the average daily cash balance of clients retained with brokers over the previous six months. Brokers are required to maintain net worth as the higher of base net worth or variable net worth.
     However, Sebi, in its consultation paper, noted that the shift in its flows has reduced the relevance of this metric, prompting a review of the framework.
     To address this, the regulator has proposed a new approach wherein variable net worth would be computed as an aggregate of multiple parameters, including average client credit balances and the scale of operations in terms of active clients.
     As per the draft, 10 per cent of the average credit balance of clients over the past six months would form one component of the calculation.
     Additionally, brokers would be required to maintain incremental net worth based on their client base. For direct clients, a requirement of Rs 50 lakh would apply for those having more than 10,000 and up to 50,000 active clients, with an additional Rs 50 lakh for every subsequent 50,000 clients or part thereof.
     For clients onboarded through Authorised Persons (APs), the proposal suggested Rs 5 lakh for up to 2,500 clients, Rs 25 lakh for more than 2,500 and up to 10,000 clients, and Rs 50 lakh for every additional 10,000 clients or part thereof.
     Sebi said the revised framework aims to strengthen the "second line of defence" -- net worth --beyond margins, ensuring that brokers maintain adequate financial buffers commensurate with the size and risks of their operations.
     The move is part of "comprehensive risk management framework and to protect the interest of investors as well as to ensure that the brokers serving large number of direct clients as well as clients through APs shall have large financial cushion to absorb losses or other unforeseen circumstances", Sebi said.
     The Securities and Exchange Board of India (Sebi) has invited public comments on the proposal till May 15.

(This story has not been edited by THE WEEK and is auto-generated from PTI)