How SEBI's Move to ask brokers to stop creating bank guarantees using client funds Affects the Trading Eco-System?

 


The Securities and Exchange Board of India (SEBI) has directed brokers to discontinue the practice of creating bank guarantees using client funds, effective May 1. This move is aimed at protecting client money and preventing potential defaults by brokers in case of market crashes or other unforeseen events. Brokers have been using idle client funds to create fixed deposits and provide leverage to other clients, but this practice will now be prohibited. The SEBI's action will help prevent systemic failures, but it will also reduce brokers' capacity to provide liquidity to clients and result in increased brokerage rates. Discount brokers will be the most affected by this change as they have been subsidizing lower broking charges with interest income. Brokers will now have to bring in their own funds to enable high rollers to trade, and they will have to cut down on leverage since their capital is limited compared to the cumulative client funds they were using.

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