NSE expresses concerns over interoperability of clearing corporations

Exchange said that it is evaluating multiple dimensions including risk management, technology, legal and operational matters

The National Stock Exchange (NSE) has expressed its reservations over Securities and Exchange Board of India's (Sebi's) expert panel proposal of interoperability of clearing corporations. Interoperability allows trading members to clear trades through a firm of their choice. Under the current set up, clearing corporations are owned by the exchange on which the trades are executed.

In an email response, NSE said that it is supportive of all matters that are in the best interest of the Indian markets and investors. "Interoperability of clearing corporations is a material change to the existing market structure and is therefore being evaluated across multiple dimensions including risk management, technology, legal and operational matters, "said NSE spokesperson.

Sebi expert panel in a recent meeting with exchanges and trading members discussed the disruptions in the functioning of a stock exchange and the respective clearing corporations. It had discussed the importance and need of single clearing corporation and cited recent past instances of trading halt occurred due to technical glitch, cyber-attack, natural and man-made calamity and so on.

It highlighted that such incidence affects the whole market since the trading member would be unable to square off open positions of investors resulting in high losses. The panel has also constituted three sub-committees-- risk management, technical issues and operational issues and asked them to submit report on this.

"Sebi has involved various market infrastructure entities including exchanges and we are working with all entities. Regulator through working groups constituted by it is evaluating all these aspects in greater detail. Sebi will decide its way forward after considering inputs from the working group," said NSE.

Sources say that Sebi is now actively considering the proposal first suggested by KV Kamath Committee in 2015. The issue came into spotlight when market witnessed technical glitches in two of the major stock exchanges. On September 4, 2017, Multi-Commodity Exchange halted trading system for over 45 minutes due to technical glitch. While in July 2017, NSE also faced disruption for more than three hours due to unidentified software problem. Earlier also, BSE had to halt trading due to network outage.

 

Sebi panel is of view that if interoperability had been operational, the uncertainty and confusion in the market would have been abated since such glitches also affect clearing corporations.

Further, the interpretability would give brokers/trading members an option to execute trades on more than one stock exchanges and help them optimize their funds better.

Currently, a broker's business is constrained by the collateral to be deposited with each clearing corporations. With interoperability in place, investors can deposit their collateral with the preferred clearing corporation and also take advantage if the lower costs provided by the other stock exchange.

Besides, the single clearing corporation would also help brokers netting of settlement which would help lower risk and hence lower the margins. "Currently, we cannot achieve the full potential of netting benefits received from the current portfolio margining system as our position fragmented across clearing corporations," said one broker on the condition of anonymity.

At present, all exchanges have their clearing corporations, which is a critical link in the stock trade settlement system. Indian Clearing Corporation, National Securities Clearing Corporation and MCX-SX Clearing Corporation settle all the trades.