SEBI Begins Evaluating Client Onboarding Rules for Streamlining Process and Reducing Risks

MUMBAI – The Securities and Exchange Board of India (SEBI) is currently in the early stage of evaluating regulations for brokers to onboard clients. The objective is to simplify the process and mitigate trading risks, especially for retail investors. In a release, SEBI stated, “SEBI, in line with the objective of ease of doing business, is at an early stage of evaluating if the aforesaid circular can be made applicable based on risk assessment of the clients. This would promote ease of compliance for brokers and investors.” The clarification was made in response to news reports suggesting that SEBI intended to restrict retail participation in derivative markets. According to SEBI, their focus has always been on adequate risk management, ease of doing business, and compliance, rather than imposing trading restrictions. Any proposals resulting in changes to the regulatory framework undergo a comprehensive consultation process with stakeholders, including the public, before decisions are made by the Board. Retail investor participation in the equity derivatives market has increased by 500% over the past three years, according to a SEBI study. Reuters reported that SEBI was discussing measures to monitor and control “disproportionate trading” in order to protect retail investors, potentially by linking the value of trades in futures and options to their income and net worth. SEBI had previously proposed a revised framework in 2017 but dropped it due to brokers’ difficulties in assessing the net worth of clients. Currently, SEBI regulations require stock brokers to have documentary evidence of the financial details of clients involved in the derivative segment. For other clients, stock brokers need to obtain documents in accordance with their risk management system. However, a recent study by SEBI revealed that nine out of ten equity derivative traders suffer financial losses in the market.