ET in the Classroom - Decoding client code modification norms

Recently, Sebi issued a circular which stream lines the client code modification norms for commodity futures in line with those for equities. The rules change the exacting penalty structure imposed by erstwhile Forward Markets Commission (FMC) which was merged with Sebi last year.
1. What is a client code (CC)? A code that identifies a client trading in the cash or derivatives segment of a stock or commodity exchange (the latter has only a derivatives segment).

The code is linked to the PAN details of the client.

2. Why the change in CC for commodity futures market? Sebi assumed con trol of the com modity futures market on September 28, 2015, after FMC was merged with it. By token, the rules in various respects for the commodities futures market are being brought in line with those for the equities markets.

One of these is rule for client code modification.

3. What are the changes made to CC? Earlier, commodi ty market brokers could not modify CC on intraday basis. Now they can. FMC mandated punching error would be construed genuine only if the difference between the original and modified client code are generally in the same sequence and mostly identical. Sebi, on the other hand, mandates that stock exchanges may waive penalty for CC modification where stock brokers are able to produce evidence to the satisfaction of the exchange to establish the modification was because of genuine error. Further, CC modified by the same member for the same client only once in a fortnight was construed as genuine. Now, not more than one such waiver per quarter will be given to a stock broker for CC modification. There was no scope for an error account under FMC. Now, error accounts will be allowed where modifications can be made.

4. Is there a big difference in terms of penalty for the modification? Yes, penalty for CC modification was a minimum of Rs 5,000 or 1% of the value of a modified trade whose value was less than 5% of the total turnover posted by a broker on a given day . If the modified trade value was more than 5% of a broker's turnover on a day , the penalty was 2% of the modified value or minimum Rs 5,000. Now the same value of CC modifications would be compared to turnover for a month against turnover for a day . Further, no minimum amount of penalty (Rs 5,000) would be applicable.

5. Why did FMC institute hefty penalties for CC modification? Because brokers were rampantly using the facility (when pen alty was a mere Rs 500-1,000 to transfer speculative losses from one client to another. The client who got the speculative loss could offset this against a speculative gain to reduce tax incidence on the gain.