Bse Mulls Setting Up Of Clearing Corporation

In what looks as an effort aimed at giving a modern touch the exchange, the Bombay Stock Exchange (BSE) is looking at the possibility of setting up a clearing corporation, which will then become the legal counter-party to all the trades done at the exchange.

The BSE currently has a clearing house, which legally cannot be a counter-party to the trades at the exchange.

A note to this effect is expected to be put before the governing board of the exchange soon. The clearing house at the BSE had come spotlight following the payment crisis when it was reported that securities worth Rs 130 crore could not be delivered to Stock Holding Corporation of India and other custodians in time.

 

Though it is yet not clear how the exchange plans to go about executing its ideas, market observers indicate that BSE has two option before it.

One of them is to simply convert or upgrade the existing the clearing house into a clearing corporation. And the second being the setting up of a new clearing corporation all together.

In either of the two cases the exchange would have to seek permission from the Central Board of Direct Taxes (CBDT) to make fresh investments.

There is view among a section of BSE brokers that since clearing corporation is a recognised entity worldwide it would be in the interest of the exchange to have a such an entity.

Currently, the BSE has 49 per cent holding in Bank of India (BoI) Shareholding, which does the clearing and settlement of trades. If the exchange plans to upgrade the status of BoI Shareholding to that of a clearing corporation then it would have to acquire the remaining 51 per cent.

This is so because the National Securities Clearing Corporation (NSCCL) which is the only clearing corporation in the country, is also a 100 per cent subsidiary of the National Stock Exchange of India (NSE).

Thus BSE would also be keen on clearing corporation which is a 100 per cent subsidiary. However, worldwide the clearing corporation is not a 100 per cent subsidiary of any one exchange and they normally undertake clearing and settlement of various stock exchanges. The classic example is that of Euroclear.

Essentially, both the clearing corporation and the clearing house have the same responsibility, one that of ensuring settlement of trades.

The difference being that while a clearing corporation is a separate legal entity and becomes a counter party to all the trades, a clearing house is a legal entity and thus cannot become a legal counter party. However, the responsibilities remains the same.

Market observers argue that even NSE's clearing corporation only guarantees settlement which is also what BSE's clearing house does. NSE's clearing corporation does not guarantee every trade and what it does is to guarantees all financial settlement.

Sources indicate that BSE's move will go a long way keeping in mind the keenness which the exchange has shown towards launching derivatives trading. The L C Gupta committee has recommended that any exchange that plans to introduce derivatives trading must have separate governing board.

However, the question remains what would BSE do with the existing clearing house if it plans to set up a new clearing corporation. Sources indicate that worldwide, clearing entities perform an important role of monitoring of member positions and that of surveillance. Hence, the argument put forward by the proponents is that, while clearing corporation would manage of settlement guarantee fund, the surveillance and other related issues would be transferred to clearing house.