Collateral segregation
Also written Segregation of client collateral · Client-level collateral segregation
SEBI's July 2021 norm requiring brokers to report client-wise collateral by category, so one client's securities cannot be misused for another client's exposure, margin or settlement.
In plain language
A broker holds collateral — cash and securities — for many clients at once. If the broker does not keep this separate, one client's assets can quietly end up covering another client's trade.
SEBI treats this as a real risk. Its fix is collateral segregation. A broker must track and report which collateral belongs to which client, one client at a time, and category by category, such as cash versus other collateral.
This way, nobody's margin can be borrowed to cover somebody else's position without anyone noticing.
How it works
SEBI introduced norms on segregation and monitoring of collaterals at client level in July 2021, to strengthen measures against the misappropriation or misuse of client securities — specifically, against using one client's securities to provide exposure, margin or settlement for another client.
Under these norms, a trading member must implement a framework for reporting client-wise collateral, bifurcated into categories such as cash and other collaterals, with further segregation into different collateral types as applicable. This is done by uploading the details onto the relevant web portal, using functionality provided by clearing corporations and exchanges for exactly this purpose.
A worked example
A brokerage holds pledged securities from two clients — Client A has pledged shares worth Rs 20 lakh, and Client B has pledged shares worth Rs 15 lakh. Before the July 2021 norms, a poorly controlled broker could, in principle, use Client A's pledged securities to provide margin cover for Client B's larger position, without either client necessarily being aware of it.
Under the collateral segregation framework, the broker must instead report each client's collateral separately on the exchange/clearing corporation portal, correctly categorised as cash or other collateral. Client A's Rs 20 lakh remains identifiably Client A's throughout, visible to regulators and traceable if a dispute arises — removing the room for the kind of cross-client misuse the norm was designed to stop.
Why NISM asks about it
Chapter 10, section 10.1, under "Duty to the Investor," introduces the July 2021 collateral segregation norms as item 2 in the broker's code of conduct duties, immediately before the requirement to issue contract notes. Expect a question on the purpose of the norm (preventing cross-client misuse of collateral) and its effective date (July 2021).
Common exam traps
- The norm is about client-level segregation, not merely broker-level record-keeping in the abstract. The specific harm being prevented is one client's collateral funding another client's exposure.
- Reporting happens through a web portal provided by clearing corporations and exchanges, not through internal broker records alone — it is externally visible and monitorable.
- Cash and "other collaterals" are reported as distinct categories, with further sub-segregation possible — a single undifferentiated "total collateral" figure does not satisfy the requirement.
Check yourself
1.Which of the following is an obligation of a member towards its clients?
- a)To use client funds for proprietary trades when the firm faces a temporary shortfall
- b)To explain delivery-related technical risks, including that a buyer not registered under GST in the delivery state may bear the GST burden
- c)To square off every client position on expiry day regardless of instructions
- d)To advertise its services widely so clients are aware of new products
Show the answer
Answer: (b) To explain delivery-related technical risks, including that a buyer not registered under GST in the delivery state may bear the GST burden
This is a genuinely useful obligation, not a formality. A buyer randomly allocated during staggered delivery cannot choose his counterparty's state — and since "the exchange does not deal with IGST but ensures collection of only CGST and SGST", a buyer without a GSTN for the delivery state finds the credit chain broken and the GST becomes a real cost.
Option (a) is expressly prohibited: ⚠️ "FUNDS IN CLIENTS' ACCOUNT NOT TO BE USED FOR PROPRIETARY TRADES OR MEETING ANY OTHER OBLIGATIONS." The same principle underlies the July 2021 collateral segregation norms and the rule that an Authorised Person must route client money through the broker.
Option (c) inverts the expiry-day rule: not squaring off without express instruction is "A RIGHT OF THE MEMBERS AND NOT AN OBLIGATION."
Option (d) is prohibited by the Code: "SHALL NOT ADVERTISE ITS BUSINESS PUBLICLY UNLESS PERMITTED BY THE STOCK EXCHANGE."
Other obligations in the same list worth knowing: explaining risks with special emphasis on internet trading · abiding by conciliation and arbitration awards · maintaining dealing-room voice recording · providing details of the client relationship manager and investor grievance redressal officer · sending account statements, daily margin statements and other reports.
And one that catches firms out: a broker is "RESPONSIBLE FOR LOSSES TO THE CLIENT DUE TO UNAUTHORIZED PMS SERVICES that he may extend either DIRECTLY OR INDIRECTLY" — including "through another entity of relatives where the broker has an influence."
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Due skill, care and diligenceA general standard in SEBI's broker code of conduct that covers gaps the specific rules miss, from delayed responses to unsuitable advice pushed on vulnerable clients.
- Expiry-day square-off rightA member's right, not obligation, to leave a client's position open on the last day of a contract unless the client expressly asks for it to be squared off.
- Electronic Contract NoteA contract note issued electronically instead of on paper — permitted only after the client's consent, given either through the client agreement or as a separate, standalone consent.