Sebi proposes allowing stockbrokers to trade in govt securities

The markets regulator will let stockbrokers deal in government securities by accessing the negotiated dealing system-ordering matching (NDS-OM) introduced by the Reserve Bank of India (RBI) in 2005.

NDS-OM is a screen-based electronic anonymous order matching system for secondary market trading in G-Secs owned by RBI. It was exclusively designed for G-Secs and maintained by the Clearing Corporation of India (CCIL).

Securities and Exchange Board of India's (Sebi) proposal on 4 October was meant to facilitate retail participation in G-Secs trading. It allowed stockbrokers to offer these services as a Separate Business Unit (SBU) of the stock broking entity itself on an arms-length basis. Public comments are invited till 25 October.

Experts said that retail participation in G-Secs was a much-needed move and this move by Sebi would provide an additional revenue stream for brokers as they can add an additional asset class to their offering.

Retail participation in G-Secs

Since stockbrokers usually have many retail clients, using the NDS-OM system is expected to increase retail participation, said Shruti Jain, the chief security officer at Arihant Capital.

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Presently, membership of the system is open to entities like banks, primary dealers, insurance companies, mutual funds, etc. “Through this new change, now brokers can directly purchase and sell G-Secs without the interference of a third-party entity like mutual funds,” she said.

Experts also believed that increasing retail participation in G-Secs, a good alternative to fixed deposits, would also boost liquidity in the G-Secs as it will allow retail investors to directly park their funds in government bonds.

Sangeeta Jhunjhunwala, partner at Khaitan Legal Associates, also predicted initial volatility during the transition period as the market adjusts to the new participants and trading dynamics. “The broader participation base could lead to increased trading volumes in government securities, enhanced price discovery mechanisms, potentially narrower bid-ask spreads, indicating improved market efficiency and greater depth in the government securities market,” she said.

Sebi directed stockbrokers to ensure SBU activities of the NDS-OM are segregated and ring-fenced from the securities market-related activities of the stockbroker and arms-length relationship between these activities are maintained.

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Qualified brokers will need to maintain a separate account for the SBU to ensure they operate independently from the securities market-related activities including compliance, finance, and all other activities, as per the paper. The SBU's net worth will also be assessed separately.

Compliance issues for stockbrokers

Legal experts suggested that if the move by Sebi goes through, it could raise several important legal and regulatory considerations for stockbrokers with an added compliance burden.

Kushagra Sharma, partner, KP Associates, said creating an SBU will require careful legal structuring to ensure proper segregation from other business activities. “This may involve amending articles of association, creating new internal governance documents, and potentially registering the SBU as a separate legal entity,” he said.

He also anticipated that the SBU will need to comply with regulations of multiple authorities. "Sebi for the main brokerage business and RBI for NDS-OM activities; this dual regulatory regime increases compliance complexity,” Sharma said.

Experts also suggested that to comply with the regulations, stockbrokers may need to invest in new technology systems or modify existing ones to integrate with the NDS-OM platform.

"Stockbrokers may face a steep learning curve in adapting to the new trading system and market dynamics of government securities. They will need to develop expertise in managing the specific market risks associated with government securities trading,” Jhunjhunwala said.

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The markets regulator clarified that the Grievance Redressal Mechanism and Investor Protection Fund (IPF) of the stock exchanges and SCORES shall not be available for investors availing the services of the SBU.

Anand K Rathi, cofounder of MIRA Money, found this to be an issue. “Most of the stock market investors can access this, so maybe a retail investor will not want to transact with SBU and still go through the MF route till the Investor Protection Fund is of access,” he said.

He believed that this issue coupled with the task of keeping accounts separate and at “arms-length distance” could possibly lead to several brokers not signing up for this. "They may do it at a later point in time, but today I do not see them signing up to becoming brokers for G-Secs," he said.