Has India Tilted the Scales Too Far? Rethinking Collateral Rules Through a US-Singapore Lens

The Indian Supreme Court’s recent decision in Edelweiss Custodial Services Ltd v NSE Clearing Ltd brought back the question of whether the current system of depositing collateral for futures and options (‘F&O’) trading is adequate to protect the investor while being operationally conducive to business.

F&O are derivative contracts that allow traders to buy or sell an underlying asset at a predetermined price at a future date. The obligations created by these contracts move rapidly. Therefore, to prevent default by investors, stock exchanges across the world have mandated an amount to be submitted before undergoing this transaction (called collateral).

Collateral regulation varies across jurisdictions. India has adopted a client-level segregation framework, while the US and Singapore demonstrate two different ways of combining operational flexibility with customer protection. This post compares these approaches to examine whether India can preserve investor protection while allowing greater operational flexibility.

Edelweiss Case and the Limits of the Pre-2020 Collateral Framework

Before 2020, collateral moved from the investor to the Trading Member (TM), then to the Clearing Member (CM) and finally to the National Stock Exchange Clearing Corporation (NCL), under the framework of the Securities Contracts (Regulation) Act, 1956 and regulations and circulars of the Securities and Exchange Board of India (SEBI). Under SEBI’s 2019 framework, TMs and CMs were required to segregate client securities and use them only for the purposes for which they were provided.

The dispute in Edelweiss Custodial Services Ltd v NSE Clearing Ltd arose after a TM defaulted following a loss in the F&O market. The professional CM liquidated the collateral held against the TM’s obligations. Because the collateral was maintained in a consolidated account without individual client-level identification, non-defaulting investors challenged the liquidation, arguing that their collateral should have been distinguished from that of defaulting investors.

The Supreme Court examined the professional CM’s obligations under the regulatory framework that existed before 2020. Regulation 4.5.4 of the NSE Clearing Limited (Futures & Options Segment) Regulations, 2000 (NSL Regulation) prohibited the use of one client’s margin for meeting another client’s obligations. The question, however, was who qualified as the ‘client’ of the professional CM. Regulation 1.7 of NSL Regulation defined client as ‘a person, on whose instructions and on whose account the Clearing Member clears and settles deals. For this purpose, the term “Client” shall include all registered constituents of trading members of Specified Exchange.’

Applying the above regulations, the Court held that the relevant client for a professional CM would only be a TM. Accordingly, Regulation 4.5.4 required the professional CM to keep the collateral of one TM separate from that of another TM. It did not, however, impose a further obligation on the professional CM to identify the individual clients of a defaulting TM and distinguish their collateral before liquidation. The obligation to maintain segregation of individual investors was only at the TM level, as they were the TM’s clients.  

Thus, this case brought into focus the legal lacuna­­—while the 2019 SEBI framework tells each intermediary to maintain separate collateral for its own clients, it does not require the collateral belonging to its clients’ clients (in this case TM clients) to be maintained separately. This had two significant consequences. First, collateral belonging to non-defaulting investors could be liquidated as part of the realisation of the defaulting TM’s assets, effectively exposing solvent investors to the losses of others. Second, investors had no privity of contract with the professional CM and therefore could not prevent the liquidation. Their only recourse lay against the TM, which could be ineffective where the TM itself was insolvent.

Revaluating the Post 2020 Indian Framework against International Standards

The collateral framework underwent a significant overhaul in 2020. Under SEBI’s 25 February 2020 Circular, securities could no longer simply be transferred through the clearing chain but had to move through a pledge and re-pledge mechanism: from the investor to the TM, then to the CM and ultimately to the NCL. Its 20 July 2021 Circular further strengthened this system by requiring client-level monitoring and reporting of collateral.

These reforms addressed the weakness exposed in Edelweiss by making collateral identifiable and attributable at the client level. However, this protection introduced additional operational requirements, including client-level record-keeping, processing pledges and re-pledges through the depository system, and reconciling collateral across the TM, CM and clearing corporation. These requirements may be particularly significant for institutional participants managing large collateral pools across multiple transactions and markets. The US Commodity Futures Trading Commission, in comparing physical segregation with operational commingling, similarly recognised that physical segregation can require separate accounts, fund transfers, reconciliation and additional technological infrastructure, making it substantially more costly than operational commingling.

This raises a broader question: does protecting individual investors necessarily require collateral to be operationally segregated at every stage? The experience of the US and Singapore suggests that it does not.

The US has the Legal Segregation with Operational Commingling model where customer collateral may be operationally commingled in a single account at the clearing level. However, the derivatives clearing organisation must maintain records attributing collateral to each individual cleared-swap customer, and cannot use the non-defaulting customer's collateral to cure another’s shortfall. This structure is beneficial for investors as it protects their security, but it does not create operational difficulties by increasing additional requirements like pledging. This legal fix to a structural problem allows individual account segregation without the operational difficulties caused by a pledging model in India.

The Singapore Exchange model permits customer collateral to be held in omnibus accounts, while also offering an Enhanced Customer Collateral Protection tier for customers who want stronger protection against fellow-customer risk. The enhanced protection allows the collateral of investors to be segregated from others, while normal customers would have their collateral commingled and exposed to fellow-customer risk. The model therefore recognises that operational commingling and protection against fellow-customer risk can be calibrated rather than treated as an all-or-nothing choice.

Recalibrating India’s Collateral Architecture 

Edelweiss Custodial Services Ltd v NSE Clearing Ltd exposes the limits of allowing collateral to be pooled without continuous client-level attribution at the clearing stage. However, the experience of the US and Singapore shows that investor protection need not depend on complete operational segregation. This post proposes a dual-track framework under which investors may choose between the existing pledge-and-repledge structure and a pooled collateral account. The latter should be permitted only where real-time, client-level record-keeping is maintained throughout the clearing chain, ensuring that the CM and NCL can always identify the ownership of collateral. This would separate operational pooling from legal traceability, allowing collateral to be managed collectively without compromising the proprietary interests of individual investors. Rather than choosing between investor protection and market efficiency, India should adopt a calibrated framework that preserves both through choice, traceability and flexibility. 

Priya Garg is an Assistant Professor at OP Jindal Global University, India and a PhD Candidate at the National University of Singapore. 

Megha Porwal is a Final Year Student at National Law University Hyderabad (NALSAR) and a Future Trainee Solicitor at Herbert Smith Freehills.