The Securities and Exchange Board of India – SEBI has proposed a new framework for calculating the net worth requirement for stockbrokers. In a consultation paper released today, the regulator said the current method of linking 10 per cent of the average daily client cash balances retained by brokers has become irrelevant after the rollout of the upstreaming mechanism, under which brokers transfer client funds to clearing corporations. Accordingly, in order to better align capital requirements with operational risks and protect investor interests, SEBI has proposed a revised approach that factors in both client funds handled and the number of active clients serviced. Stating that the net worth acts as a “second line of defence” and should be robust enough to absorb risks not covered by margins, SEBI has suggested that the variable net worth should be calculated as the aggregate of three components. These include 10 per cent of the average credit balance of clients over the previous six months, a slab-based requirement linked to the number of active direct clients, and an additional requirement based on clients onboarded through authorised persons (APs).
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