Govt proposes setting up of common Clearing Corp for commexes

The Finance Ministry has sought public comments on a proposal to set up a common 'Clearing Corporation' for national commodity bourses in order to reduce transaction cost of market participants as well as strengthen risk management systems.
At present, national commodity exchanges have integrated online facilities for trading, clearing and settlement of futures contracts.
Only one exchange -- NCDEX -- has set up a Clearing Corporation which is a 100 per cent subsidiary of the exchange, for clearing and settlement of trades executed on the exchange.
All other national bourses have clearing and settlement functions as a division of the exchanges. The contracts are cash settled or settled by physical delivery at expiration.

In a report submitted to the Finance Ministry, the Working Group has recommended an independent common Clearing Corporation (CC) for the national commodity exchanges after studying various vertically integrated models of trading, clearing and settlement.
The public views on the report are sought by next month.

The Group has suggested setting up of an independent CC with a minimum net worth of Rs 100 crore to begin with, which should be reassessed after a period of one year.
The clearing and settlement of trades within the CC should be across commodity exchanges, for benefits of reduced collateral, cross margining, multilateral netting etc to flow to the participants.

Since the commodity bourses have expressed apprehensions of the impact on their profitability if the clearing functions are performed by another entity, the Group has suggested that the CC may allow the exchanges to retain their contribution to the 'Settlement Guarantee Fund' with them, for a pre-defined period, after creating a suitable exposure mitigation vehicle.
"This will provide cushion to the exchanges in their transition to the new model," the report said.
The Group also said that CC's risk management framework should be consistent with updated principles of the Committee on Payment and Settlement Systems (CPSS) and International Organisation of Securities Commissions (IOSCO) for Financial Market Infrastructures, released in April 2012.

The Forward Markets Commission (FMC) and the Risk Management Group constituted by it may frame the modalities for the implementation of the principles, it added.
Since warehousing is an integral part of the settlement process of commodity futures contracts, the Group said the CC should coordinate with the Warehousing Development Regulatory Authority (WDRA) and state governments and put in place a document stipulating the standard operating procedures, including the delivery mechanism for contract specifications designed by the exchanges.