SEBI has proposed to segregate the funds collected by brokers and identify them in the name of each client, this is happening two decades after margin collection by brokers for derivatives trading came into play. So far, the clearing corporation (CC) of stock exchanges settling the trades identified all the margin collected as that of the trading (brokers) or clearing members (CM) even if it belonged to clients.

A ₹460-crore default by a broker of IL&FS drove it to a crisis as the clearing arm of the National Stock Exchange froze its entire collateral.  Many IL&FS clients complained about their margin collateral being blocked even though they had not defaulted. Most broker defaults created similar crises where the collateral of one client is used by the broker for another client or even proprietary trading. With the exchanges not seeking a client-wise distinction of the margin deposited. A Supreme Court Bench of Justices Mohan Shantanagoudar and Sanjiv Khannahad came down on SEBI when it was unwilling to investigate the IL&FS default, claiming that it did not fall under its jurisdiction. The 2019 case highlighted numerous deficiencies in collateral management and the deficiency of SEBI norms. Outlining what the proposed changes will mean, SEBI stated that the segregation of client collateral indicates identifying and protecting the client collateral from misappropriation, misuse by trading/clearing members, or in case of defaults. SEBI has proposed that when clients provide collateral to the trading (TM) or clearing member, they may maintain a portion and transfer the rest to CC. A CC will have visibility of the client to whom such securities belong and will assign the value of the securities collateral accordingly, based on an applicable haircut, to the client’s account.

SEBI intends to build a mechanism for reporting, dissemination, and usage of information about collateral other than the securities collateral obtained by the way of pledge/re-pledge mechanism. According to the expert, this reform was much needed and has been long delayed and its implementation should not be delayed. SEBI has also suggested procedures for reporting, collateral deposit, and allocation, valuation, blocking of margins, various levels of monitoring, settlement, withdrawal of collateral, default management process, and many other probabilities.