India’s capital markets have thrived under a vertically integrated model where stock exchanges and their clearing corporations (CCPs) operate in close synchrony. This framework— linking trading, risk management, clearing, and settlement — has consistently delivered on-time settlements, robust systemic safeguards, and globally competitive transaction costs. Recent regulatory consultations propose significant shifts: diluting exchange ownership in CCPs, unbundling clearing and trading fees and potentially separating clearing functions from exchanges.

While the underlying objective is to enhance governance and transparency, these changes raise critical concerns about unintended consequences for operational efficiency and market stability.

In developed markets such as the US and Europe, clearing systems evolved around end-of-day margining and batch-based settlements. These are geared for environments dominated by well-capitalised institutional intermediaries who manage most intra-day risk themselves. Client-level pre-trade checks are minimal, and real-time margin enforcement is not standard practice.

India, by contrast, pioneered real-time risk controls with client-level margining and continuous exposure tracking. This was made possible through tight integration between exchanges and their CCPs — both technologically and institutionally.

SEBI mandates that 75 per cent of the Settlement Guarantee Fund (SGF) — used to cover member defaults — must be contributed by the exchange and its clearing arm. This embeds financial accountability within institutions that benefit from trading activity and ensures strong alignment of incentives.

In India, risk management and clearing are not relegated to the back office — they are critical frontline functions that underpin market confidence, operational continuity, and systemic stability. The seamless integration of these functions into the trading ecosystem has been a key pillar of market resilience, allowing Indian markets to absorb global shocks without disruption. Undermining this model through structural separation risks weakening a system that has consistently delivered under pressure.

One regulatory concern appears to be the potential conflict of interest, where exchanges might prioritise commercial objectives over systemic prudence. Yet, India’s track record offers reassurance.

From the 2008 Global Financial Crisis to the Covid market volatility, Indian CCPs have responded with agility — promptly raising margins, managing defaults, and maintaining orderly markets. Rather than cutting corners, exchanges have consistently invested in capital and infrastructure to strengthen their clearing arms.

Moreover, Indian exchanges are already entrusted with quasi-regulatory roles: surveillance, compliance, and investor protection. If SEBI trusts them with these functions, their continued leadership in risk management should be seen as a strength, not a conflict.

Governance mechanisms have also matured. CCP boards include a majority of public interest directors, and SEBI exercises oversight over key risk decisions. Where improvements are warranted, targeted refinements — not structural overhauls — would be more effective.

Context Matters

Arguments for structural separation often cite US and European models, where clearing and trading are distinct. But these systems emerged under different historical and operational contexts. For instance, DTCC in the US was shaped by the 1970s “paperwork crisis” and supports fragmented regional exchanges. Its risk controls rely heavily on institutional brokers and end-of-day netting, not real-time client-level monitoring.

India’s architecture, by contrast, is heavily retail-driven, with microsecond trading and real-time margin checks. Introducing a detached CCP here could slow down risk responses and reduce pre-trade validation precision.

Even in the US, vertical integration is the norm in futures markets such as CME and ICE Groups. In Europe, efforts to separate clearing and trading have led to concerns about new systemic risks. These global experiences highlight that reforms must be tailored to functional realities, not modelled on foreign precedents.

Misplaced Comparisons

Some cite the Clearing Corporation of India Ltd. (CCIL) as a model for a horizontal utility. But CCIL serves wholesale markets like government securities and inter-bank forex —dominated by banks and large institutions under RBI supervision.

In contrast, India’s equity and derivatives markets operate at high velocity, driven by millions of retail participants and characterised by intense trading frequency. These markets demand ultra-low latency, real-time risk management and seamless trade innovation. The CCIL model, designed for slower, institution-driven markets, is ill-suited to this context given the fundamentally different market structure and participant profile.

Proposals to restructure CCP ownership to resemble listed exchanges — by distributing shares among exchange shareholders, while being impractical could actually fragment governance. These shareholders, often passive financial investors, may lack the operational focus and long-term commitment necessary for CCP oversight.

A CCP must remain resilient at all times, particularly during market stress. This requires engaged, mission-aligned ownership — ideally by entities invested in the market’s integrity and performance. Diluting this commitment could weaken the very institutions responsible for managing counterparty risk and settlement finality.

None of this implies that reforms are unnecessary. Governance enhancements — such as broader board diversity, formal conflict-of-interest policies, improved disclosures, and transparency in default fund usage — are welcome and achievable within the current integrated model.

Another proposal is the unbundling of trading and clearing fees. Though well-intentioned, this could lead to “double marginalisation” — where each entity seeks to maximise its own revenues, raising total costs for participants.

Bundled pricing allows exchanges and CCPs to optimise pricing holistically — cross-subsidising between trading and clearing.

Empirical evidence from Europe shows that unbundling led to greater complexity, opaque costs, and limited investor benefit.

Even in the US, where unbundled models exist, the relative cost of clearing in equities (via DTCC) is comparable to the bundled cost in derivatives (via vertically integrated futures exchanges). The efficiency gains of integration should not be underestimated.

Reform with Continuity

India’s market structure has enabled global firsts: T+1 equity settlement, real-time margining, and CCP interoperability. These achievements are not incidental — they stem from a design philosophy that prioritizes coherence and coordination across market functions.

Disrupting this framework without compelling evidence of failure risks introducing inefficiencies, increasing systemic risk, and slowing market innovation. There’s no indication that India’s model is broken — on the contrary, it has performed exceptionally across multiple crises.

SEBI’s objectives of enhanced resilience, transparency and governance are universally shared. But the path forward should lie in calibrated enhancements and refining what works— not replacing it with structures designed for different markets and different eras. India’s clearing and risk management systems have been a source of strength. Let’s build on this foundation — with better governance, greater transparency, and calibrated reforms —while preserving the coherence that has brought us here.

The writer is founding Partner, SPRV Consultants

Published on June 13, 2025