Why do brokers keep securities in pooled account

General
1

Hello Experts,

I have a question related to operations of a broker in India.

Some brokers dont credit securities directly into the demat of the client but keep them in their own pooled account with monthly or sometimes quarterly settlement. What is the benifit to a broker if they keep the securities in their pooled account ?
@VenuMadhav, @nithin

2

Usually such brokers would have also offered purchasing these securities with some leverage. Which means they would have blocked their own funds on your behalf.

The advantage for a broker when the securities is in their pool account is that they can pledge and borrow against that.

3

Thanks @nithin:

How do they earn more from the borrowed money than what they pay as interest without taking additional risk ? Is there a possibility that if they default on borrowed money they are forced to liquidate their pooled account - which puts the BOs at risk in such events ?

I am not able to understand what they can do with the borrowed money which does not add risk to outyield the borrowing cost.

4

Hmm… straight forward isn’t it?

The rate at which you borrow money vs what is lent at, is the spread which adds to revenue. And yes, of course there is risk. Stocks in pool account would be pledged to an NBFC, so yeah if the broker defaults the NBFC has every right to sell the collateral. But yeah, without keeping the stock in pool account, it wouldn’t make any business sense for broker to offer leverage on delivery trades (unless you are a bank flush with funds).

5

So to clarify…when a client request leverage against his/her delivered based investment than only broker borrow money from NBFC?

Or they borrow against clients shares without even client knowing about it?

6

If you have paid full money and bought the stock, it should ideally be in your demat account. Once in your demat, no one else can touch it. If you have paid full money and broker still keeps it in his pool, that is an issue. Maybe you should complain to him. Because when in pool account of the broker, he could potentially be borrowing against it even if you don’t want the leverage.

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