Market regulator Sebi on Monday came out with a fresh proposal for the segregation and monitoring of collateral at client level amid instances of misuse of client collateral by trading members.

It has also proposed to build a mechanism for reporting, dissemination and use of information pertaining to collateral other than securities collateral received by way of pledge or repledge mechanism.

Issuing a consultation paper, Sebi said the proposed framework is aimed at ensuring the protection of client collateral.

The proposal comes in the wake of the Karvy Stock Broking crisis where clients’ shares had been pledged illegally as collateral against loan.

Segregation of client collateral refers to the procedures that enable identification and protection of client collateral from misuse by trading or clearing members and protection from default of such members or other clients.

In the past, there have been instances of misuse of client collateral by trading members (TM) or clearing members (CM). This becomes even more accentuated at the time of default of a TM/CM, Sebi noted.

In such a scenario, not only confidence of investors in market integrity is shaken, but it also brings disrepute to the entire ecosystem of trading, it added.