Big-Broker Monopoly Feared In Derivatives

Several medium and small brokers fear that the introduction of clearing member in the three-tier derivative system is likely to create a monopoly of big brokers.

The three-tier structure, as recommended by the Securities and Exchange Board of India (Sebi) for the derivative segment, includes clearing by a professional, who will act as a custodian and will be responsible to settle all trades by institutions, at the top level.

This is followed by a clearing-cum-trading member and trading members. A clearing member will function like a custodian and is responsible to settle all trades of members.

Pradeep Joshi, a city-based broker, said: "The introduction of clearing member will force every trading member to get registered with the intermediary clearing-cum-trading member, who will sit back and share the brokerage for the business brought in by the trading member. He will also collect deposits from these trading members at their discretion."

Some other brokers point that the entry norms for clearing-cum-trading members have been kept stringent so that ordinary brokers are forced to opt for trading membership only. Instead, Sebi should have allowed only two types of memberships -- a professional clearing member and trading members.

Further, they feel, every trading member should have been allowed to gain exposure as per their net worth. For a clearing member with/without trading right, a net worth of Rs 3 crore has been fixed. Further, he should have a security deposit of Rs 12.5 lakh in cash and Rs 12.5 lakh in the form of fixed deposit receipts.

Moreover, a one-time charge of Rs 8 lakh for clearing members with trading rights and Rs 5 lakh for clearing members without trading rights have been fixed.

Jayesh Seth, another city-based broker said, "A clearing member as an intermediary is not needed as he does no value-addition in the capital market value chain."

"The uploading of trades can also be done directly by the trading member to the professional clearing member through the stock exchange system. Instead the trading member has to upload his daily trade to the clearing-cum-trading member, who in turn will pass on this same data to the professional clearing member through the stock exchange systems," he added.

Brokers also point out that a clearing-cum-trading member will exhort five basis points as service charge from trading members for all their trades as well as their confidential client information will have to be parted forcibly to them.

This, brokers fear, will ultimately result in the clearing-cum-trading member stealing away all the clients of trading members due to his officially granted superior status.

Interestingly, the three-tier system only exists on the Nasdaq derivatives market, which has been a disaster. After Nasdaq, only Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the two exchanges to follow the system.

A recent research by the US-based financial research company, Robert Walter, has pointed out that the disastrous volumes in Nasdaq should be abolished and only two tiers should be kept.

Already, Nasdaq is seriously contemplating shifting to this new system, and awaiting final approval. However, Sebi officials refused to comment on the issue.