Mixed response to ‘no’ to single clearing house

There have been mixed reactions by market experts to the KV Kamath Committee saying ‘no’ to setting up a single clearing corporation (for clearing and settlement of trades) and deferring inter-operability.

An exchange official requesting anonymity said: “It was an opportunity for us to garner business from the larger exchange. We are prepared to wait for that day as inter-operability has only been deferred, not disallowed.”

Inter-operability occurs when a trade executed on one exchange (say NSE) can be cleared and settled by other (BSE) or vice versa.

Currently, it is mandatory for stock exchanges to clear and settle their trades through their own arms.

Tejesh Chitlangi, Partner - IC Legal, says, “Having a single clearing corporation is the preferred mode in many of the developed countries, including the US. However, the same is currently not apt for Indian conditions due to the concentration and systemic risks it may pose.

The prominent stock exchanges even now have their separate clearing corporations, though the same has proved to be difficult for exchanges, such as Calcutta Stock Exchange. The proposed inter-operability might come to the rescue of even other exchanges which may be set up in future and which may find the requirements pertaining to setting up their own clearing corporation onerous.”  

Inter-operability also has the potential to create a monopoly, feel some.

Arun Kejriwal, Founder, KRIS Research, says “Monopoly has been ruled out in the near future and creation of a monolithic institution (due to inter-operability), which could kill competition and become a monopoly has also been avoided.”

The KV Kamath Committee observed that a single clearing corporation across exchanges encompassing equities, debt and derivatives on equities, debt and currency, would introduce significant concentrated risk into the capital markets, implying a “too big to fail” scenario, besides increasing systemic risk and potential misuse of monopoly.

Though inter-operability would offer members the option of selecting clearing corporations of their choice for efficient use of funds, the committee felt that market infrastructure institutions (exchanges, depositories and CCs) in India were at different stages of evolution and lacked suitable framework.

In addition, a possible change in the CC landscape post-FMC-SEBI merger prompted the committee to recommend status quo, besides suggesting that SEBI undertake further research.

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