Brokers For Common Clearing

As the storm over the payment crisis settles down on the Bombay Stock Exchange, brokers are demanding a uniform clearing and settlement mechanism. According to leading brokers, there is a need for exchanges to implement a common clearing and settlement mechanism to ensure that the individual exchange risk is minimised. BSE and NSE have respective trade guarantee schemes. However, the methodology used for ensuring the completion of the settlement differs on both exchanges.

Says an executive vice president at a leading institutional brokerage who handles dealing: "There is a need to look ahead and think about a common clearing and settlement mechanism for all stock exchanges on lines of Euroclear. This is a lesson to be learnt from the recent problems of payment on bourses."

 

BSE's trade guarantee fund (currently at close to Rs 320 crore) was not touched for ensuring the settlement on time during the payment crisis. Instead, the exchange administration gave an opportunity to brokers involved to organise for money to ensure the settlement on time. Sebi endorses the BSE move to use possible means prior to dipping into the TGF.

The NSE has a settlement guarantee fund (currently at close Rs 450 crore) where the clearing corporation guarantees every trade and is a legal counter party. "The clearing corporation ensures that the settlement is completed by using the settlement guarantee fund. The clearing corporation later follows it up with the concerned broker for the recovery of funds. It is only then the broker is declared a defaulter," NSE managing director R H Patil said.

BSE executive director R C Mathur is of the view that for the mistake of a few brokers, the exchange need not penalise other members. "If there is a problem for a few brokers, there is no need for the exchange to dip into the trade guarantee fund set up with contributions from all members. As far as possible, the dependence on the TGF should be reduced," he said.

Brokers say that the exchange is hesitant to declare them defaulters as BSE is a closely knit association. "BSE is a closed club of brokers. They are very apprehensive about declaring any member a defaulter. The BSE administration is closely involved with brokers as they are involved in the governing of the exchange. There is a need to move decisively in case of payment problems and close the issue quickly. NSE does that very efficiently. This ensures that rumours of default do not hamper the trading sentiment on bourses," a managing director of a leading institutional brokerage said.

The the institutional brokerage added that there is a need to give more time for these two guarantee schemes. "There is a need to put sufficient history behind us to decide which system worked better. The exchange administration of stock exchanges needs to ensure that a crisis on one bourse does not spill over to the other as many brokers have multiple memberships," he added.