Brokers stare at lower float after account settlement diktat

Only 20-30% of the float money or cash balances returned by brokers to clients on Friday owing to the regulatory diktat on running account settlement has made its way back into the broking ecosystem.

According to estimates, more than `25,000 crore was returned to clients on Friday, of which about `14,000 crore was settled by a single broker. Brokers expect a large portion of this amount to come back in the form of margin money from active clients over the next few days. However, 10-15% of the money may not come back into the system.

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According to him, about 20% of the funds that left the broker’s system on Friday returned on Monday, and the majority of the remaining funds should do the same by Thursday, the first weekly expiry.

“The float of clients who have not executed any trades in the last 30 days or have been inactive is unlikely to come back,” added another broker, on condition of anonymity.

Overall, this could result in a lower float for brokers, impacting revenues, and will necessitate a higher working capital. For example, payment gateways (PG) settle funds with brokers on T+1. So if a broker allows clients to trade instantly with funds transferred using a PG the broker’s own capital is blocked.

“On the Monday after the account settlement, more funds might be transferred to trade using PG. If the broker allows buying stocks with proceeds from stocks sold immediately, the broker’s own funds will be blocked until the exchange settles by T+2 days. While this isn’t directly related to the account settlement, it will all add up,” Nithin Kamath, founder of Zerodha, had said in a tweet last Thursday.

He had said the running account settlement on a single day was kind of unique to India. “In most countries, brokers, like banks, can hold unused funds forever and also use them for working capital requirements. In India, client funds can only be used for that customer’s trades.”

According to earlier regulations, brokers had to settle the client’s unused funds lying in the trading accounts at least once in 90 days (every quarter) or 30 days. This was on a rolling settlement basis and referred to as ‘running account settlement’ or ‘quarterly settlement of funds’. The aim was to prevent misuse of excess cash by brokers.

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Under the new norms, the entire industry has to carry out the quarterly or monthly settlement on a specific date, which is the first Friday of each quarter or the first Friday of every month. Clients’ running accounts will be considered settled only by making actual payment into their bank accounts and not by making any journal entries. Clients are to be intimated by SMS and email.

Brokers who don’t have adequate funding capabilities will bear the brunt of the new norms.

In 2021, Sebi had held extensive consultations with stock exchanges and industry representatives to devise a framework to mitigate the risk of misuse of client’s funds.