SEBI Proposes UCC Modification Relief for ETF Market Makers

Consultation Paper; dated: 20.06.2025

The Securities and Exchange Board of India (SEBI) has proposed amendments to existing norms to allow Market Makers (MMs) of Exchange Traded Funds (ETFs) to modify the Unique Client Code (UCC) without incurring penalties. This move is aimed at facilitating efficient net settlement and enhancing operational flexibility in the ETF ecosystem.

1. What is a Unique Client Code (UCC)?

A Unique Client Code is a distinct identification number assigned to each investor by a broker or financial institution. It enables:

• Tracking of client transactions
• Prevention of duplication or misreporting
• Regulatory oversight and audit trails

Strict rules currently govern modification of UCCs, with penalties often levied on post-trade changes to preserve integrity and traceability.

2. Proposed Change for ETF Market Makers

SEBI has proposed that:

• Market Makers of ETFs be allowed to modify the UCC used in trades without facing penalties, provided the change is necessary for net settlement.
• This flexibility aims to resolve operational issues in ETF transactions where market-making requires adjustments across multiple UCCs for balancing positions.

3. Extension to Institutional Clients

Further, SEBI has proposed that:

• Penalties for UCC modifications by institutional investors, such as banks, may not apply if the modification is between UCCs linked to the same PAN (Permanent Account Number).
• This ensures that client identification remains consistent, even if the trade is re-allocated among internal accounts of the same institution.

4. Rationale Behind the Proposal

• Facilitate Smooth Market-Making – ETF market makers frequently execute trades across accounts to maintain liquidity and price efficiency. Penalising UCC updates may hinder this process.
• Support Net Settlement – Allowing UCC changes enables offsetting of positions under a single netting umbrella.
• Avoid Unnecessary Penalties – Where no risk of misuse or misreporting exists—especially when the PAN remains unchanged—penalties may be counterproductive.

5. Implications for Market Participants

• Market Makers will benefit from operational flexibility without fear of penal actions.
• Institutional investors, including banks and large FIs, gain clarity on UCC modifications that are administrative in nature and not indicative of malfeasance.
• The proposal promotes ease of compliance, cost efficiency, and greater participation in ETF markets.

6. Conclusion

SEBI’s proposal is a progressive step toward removing operational bottlenecks in the securities market while maintaining transparency and accountability. Stakeholders are invited to submit comments, after which the final framework will be notified.

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