PASS Securities Operations and Risk Management Examination Difficulty: Beginner 2 Questions   5 min read
📌 Chapter 3.2 — FRONT OFFICE OPERATIONS

Consider the operational headache of a client who actively trades across equity and derivatives but finds the daily chore of issuing a payout request for their surplus funds tedious. Your firm holds a credit balance of INR 5 lakhs in their ledger after a successful series of sell trades, but they are wary of the broker holding onto these funds indefinitely without a clear mandate.

This is where the Running Account Authorization (RAA) becomes the vital bridge between client convenience and regulatory necessity. Under SEBI guidelines, a broker cannot simply retain client funds; they must settle these accounts at least once every 30 or 90 days, depending on the client’s preference, unless an explicit authorization is in place.

From an operational perspective, the RAA allows the firm to maintain the client’s surplus balance to meet future margin requirements or settlement obligations without requiring a fresh request for every transaction. You must ensure that this authorization is not a one-time ’tick-the-box’ exercise during onboarding but a periodic, verifiable mandate. If a client has opted for the 90-day settlement cycle, your back-office systems must trigger an automated reconciliation on the cycle end-date to identify the surplus funds available for return.

You then process the pay-out to the client’s mapped bank account, ensuring that the ledger balance is effectively cleared to zero, barring any margin blocks or pending obligations.

Failure to manage this process correctly often leads to the ‘unclaimed funds’ dilemma, which is a major red flag during SEBI inspections. If you retain client funds beyond the authorized period without a valid mandate, you are essentially treating client money as working capital, which is a strict violation of the Securities Contracts (Regulation) Act.

When a client performs a trade and subsequently realizes their funds were held up in an unauthorized ‘running account,’ they may raise a grievance regarding liquidity constraints. Mastering the RAA process means your firm avoids the heavy penalties associated with unauthorized fund retention and keeps the audit trail clean for both internal and exchange-led surveillance teams.

Nuance

⚠️ Nuance
Many candidates mistakenly believe that RAA is a permanent, set-and-forget mandate that eliminates all settlement obligations. In reality, the authorization does not remove the broker’s duty to conduct a ‘settlement of funds’ at the end of the selected cycle; it only permits the broker to hold funds between those mandatory settlement dates. Even with an RAA, the broker must provide a statement of accounts to the client, and any failure to return funds at the end of the 30-day or 90-day window constitutes a breach of professional conduct.

Check Your Understanding

Practice Question 1

A client has provided a 90-day Running Account Authorization. What is the broker’s primary obligation regarding the client’s surplus funds?

Practice Question 2

If a broker fails to settle a running account within the prescribed time limit, what is the regulatory implication?

This is a companion read for Section 3.2 — FRONT OFFICE OPERATIONS from PASS Securities Operations and Risk Management Examination by Akhilesh Gururani, available on Amazon Kindle.

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