Interoperability in clearing and settlement: SEBI leads the way

The market regulator, Securities and Exchange Board of India, needs to be commended for its efforts to introduce interoperability in clearing and settlement in the Indian market. The move is not only in the interest of the small investor but it will also make Indian securities markets the first to bring about interoperability in the derivatives market, in a system where risk management is carried out real-time. The move aims to protect the collateral that investors deposit with clearing corporations and shield them against systemic failures. Interoperability of clearing and settlement in equity, equity derivatives and currency derivatives from June this year will enable market participants to select either of the three clearing corporations — NSE Clearing, Indian Clearing Corporation, or Metropolitan Clearing Corporation of India — to clear and settle the trades. As of now, post-trade settlement has to be done only on the clearing corporation linked to the exchange on which the transaction is executed. With consolidation of client positions, collaterals and settlement with a single clearing house, SEBI expects that costs will come down and there will be better efficiency in the settlement process.

The SEBI circular that laid down the guidelines for moving clearing houses towards sharing their facilities was modelled along Principle 20 of Principles for Financial Market Infrastructures, prescribed by the Committee on Payments and Settlement Systems and the Technical Committee of International Organization of Securities Commissions. While such a structure has been under discussion among global market infrastructure institutions, this is the first time that interoperability in settlement is being tried in the derivatives market, where client positions have to move seamlessly between clearing houses. Also since Indian stock exchanges carry out risk management on a real-time basis, that is client margins are matched to the trade value as soon as the transaction is executed, the task gets much more challenging. It is heartening to note that Indian exchanges are open to accepting this change and are working towards meeting the June 1 deadline given by SEBI. Various agreements dealing with communication links between the clearing corporations and trading venues, settlement processes, market surveillance, sharing of data, default handling and dispute resolution are being worked out. It is good to note that the market regulator is closely working with stakeholders to address the concerns and find solutions.

Since this is the first time that a task of this scale is being attempted, global MIIs (market infrastructure institutions) are keenly watching this experiment; there will be learnings from this for exchanges and clearing houses around the world. It is therefore necessary that care is taken not to show haste, but to give enough time to stakeholders to suitably test the system and iron out glitches. Trading members should also be given sufficient time to understand the change and to switch to the new design. Since the entire post-trade architecture of the stock market is now shifting to a more complicated structure, any glitches can throw the stock market into disarray.

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