FIA said the proposed framework should be based on the actual risks faced by brokers and should not account for risks that are already addressed through existing safeguards such as upfront margins, collateral controls, and the upstreaming of client funds.

Sebi had proposed linking brokers’ variable net worth requirements to the scale and risk of their operations based on metrics such as aggregate client funds, the number of active clients, and clients onboarded through authorised persons (APs). Alongside average client credit balances, the regulator proposed an additional net worth requirement of ₹50 lakh for brokers with 10,000-50,000 active clients and a further ₹50 lakh for every additional 50,000 clients. For clients sourced through APs, the requirement would range from ₹5 lakh for up to 2,500 clients to ₹50 lakh for every additional 10,000 clients beyond the initial threshold.

Sebi has said the changes are intended to serve as a “second line of defence”, ensuring brokers maintain sufficient capital to cover risks not addressed through margin requirements.

However, FIA said increasing net worth requirements based on client deposits could result in capital being held against exposures that have already been substantially mitigated or removed from brokers’ balance sheets. “It may also have the effect of penalising brokers for maintaining or encouraging higher client collateral buffers, even where those buffers strengthen default resilience,” the association said.

The body also argued that the proposal risks conflating client-related risk with proprietary trading risk, despite the two being conceptually distinct. “If proprietary trading risk is the relevant regulatory concern, it should be addressed directly and calibrated by reference to the broker’s proprietary exposures, rather than through proxies such as client deposits or client count,” FIA said.

Sebi introduced the variable net worth framework in 2022, requiring brokers to maintain capital equivalent to 10 per cent of the average daily cash balances retained from clients over the preceding six months. However, FIA noted that the framework has become less effective following the implementation of the upstreaming mechanism, under which client funds are transferred to clearing corporations, leaving brokers with minimal client cash balances.

While acknowledging that India’s framework materially reduces the risk of client assets being exposed to broker insolvency, FIA said any revised capital requirement should be carefully calibrated to reflect the actual residual risks borne by brokers.

The association warned that higher capital requirements could ultimately be passed on to investors through increased trading costs and may disproportionately affect smaller intermediaries. It instead suggested targeted measures such as enhanced concentration margins for large or correlated positions and explicit capital-linked limits on proprietary trading activity.