Mint explores what Sebi has proposed and why experts believe the proposal could help smaller corporations like Indian Clearing Corp. Ltd get a larger market share. Sebi’s proposal is open for public comment until 13 December.
What is the function of clearing corporations and what is their structure currently?
Clearing corporations or clearing houses are essential entities linked to stock exchanges. Their primary function is to ensure seamless clearing operations, generating revenue through services, interest on float, and maintaining a settlement guarantee fund (SGF) to cover future counterparty risks, boosting trader and investor confidence.
Currently, clearing corporations are fully owned by their parent stock exchanges, creating potential conflicts of interest, as their financials are tied to the exchange. These are some of the prominent clearing corporations in India:
- The Indian Clearing Corp. Ltd (ICCL), wholly owned subsidiary of the BSE
- Metropolitan Clearing Corp. of India Ltd (MCCIL), wholly owned subsidiary of the Metropolitan Stock Exchange
- Multi Commodity Exchange Clearing Corp. Ltd (MCXCL), wholly owned subsidiary of Multi Commodity Exchange of India Ltd (MCX)
- National Commodity Clearing Corp. Ltd (NCCCL), wholly owned National Commodity & Derivatives Exchange Ltd. (NCDEX)
- National Securities Clearing Corp. Ltd (NSCCL), a wholly owned subsidiary of National Stock Exchange (NSE).
To be clear, the present provisions state that at least 51% of a clearing corporation’s equity must be held by stock exchanges. Non-exchange entities can hold up to 5%, with specific categories like depositories, banks, and insurance companies allowed up to 15%. When the exchange itself is listed, this also leads to the vicarious listing of its subsidiary clearing corporation.
Experts suggest that Sebi’s move may limit the exchanges’ control over clearing operations and impact revenue streams.
What concerns does Sebi have?
Clearing corporations largely depend on their parent exchanges for capital to strengthen their settlement guarantee fund (SGF) and invest in infrastructure, risk management, or human resources. In the short term, funding a clearing corporation’s capital needs might conflict with the commercial goals of the parent exchange and its shareholders. Clearing houses owned by the major exchange process most trades across the two largest equity exchanges.
Sebi noted it was important for clearing corporations to be independent from exchanges, especially in interoperable segments, to ensure a fair, unbiased environment across market infrastructure institutions (MIIs). With market growth, players and intermediaries now have a vested interest in independent and well-capitalized clearing corporations. Systemically, independent clearing corporations and exchanges reduce concentration risks tied to specific entities.
Globally, some clearing corporations are independent, while others are exchange subsidiaries. In markets with multiple exchanges (like the US and EU), clearing corporations are often widely held, while in markets with a dominant exchange (like the UK and Australia), they tend to be exchange-owned. Sebi advocates broadening clearing corporations ownership, especially in interoperable segments, to enhance independence and market stability.
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What are the proposals for ownership diversification?
Sebi’s proposal seeks to reduce the dominance of parent exchanges in clearing corporations by broadening their ownership base. It suggests a model where 49% of a clearing corporations’s shares could be distributed to existing shareholders of the parent exchange, while the exchange retains 51%.
Over time, the parent exchange would gradually reduce its stake to below 15%, potentially by selling shares to other exchanges. An alternative approach could involve transferring the entire clearing corporation’s shareholding to the exchange’s existing shareholders, creating a clear separation between the clearing corporation and its parent exchange. However, this would require amendments to current regulations, particularly those stipulating that exchanges must own at least 51% of their clearing corporations.
Clearing corporations would continue to operate as profit-driven entities, with governance checks to ensure transparency, while remaining prohibited from listing on stock exchanges to avoid market pressure. The proposal also suggests that clearing corporations generate sufficient revenue through fees, reducing reliance on parent exchanges or shareholders for funding.
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What experts say
Experts suggest that Sebi’s move may limit the exchanges’ control over clearing operations and impact revenue streams. While this may enhance the clearing corporations’ independence, it could ultimately benefit the ecosystem by ensuring impartiality, they said.
Nirbhay Vassa, whole-time director and chief financial officer of Abans Group, a firm providing various services, including broking services, believes Sebi’s call for a diversified ownership model would ensure that clearing corporations operate in public interest, rather than being tied to stock exchanges’ priorities.
Echoing this sentiment, Jyoti Prakash Gadia, managing director at Resurgent India, highlighted that being subsidiaries of two major stock exchanges affected the independence of clearing corporations, with potential bias in favour of the parent exchange in day-to-day operations. Even a small bias could have wide-ranging effects as volumes increase.
Narinder Wadhwa, managing director of stockbroker firm SKI Capitals, emphasized that the shift would reduce exchanges’ control, especially over regulatory decisions and strategic operations. “While exchanges may gain financially from divesting part of their ownership, they would lose a continuous revenue stream from clearing operations, which generate income through spreads and overnight investments. Currently, 99% of business is with NSE Clearing Ltd (NCL), and regulators are concerned about too much concentration,” he added.
Wadhwa also said logistical challenges, such as the need for separate operations, independent premises and data centres, add to regulatory and operational expenses.
Tejas Khoday, co-founder and chief executive officer of stock broking platform Fyers, estimated that the proposal could benefit smaller clearing corporations like ICCL, which would have more room for growth if they could offer better terms to clearing members and manage bottlenecks during high-volume activities.
Wadhwa also believed that if the proposal is accepted, it could create more competition by allowing international players to enter the market, ultimately improving services for investors and intermediaries.
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