By Indra Chourasia and Natarajan R
The Securities and Exchange Board of India (SEBI) has been considering a reframing of ownership and economic structure of clearing corporations (CCs) in the equities markets to diversify their ownership. Currently, these CCs operate as 100% owned subsidiaries of their parent exchanges.
Given the vital risk management role played by CCs, strengthening their financial and operational independence, decoupled from stock exchanges, becomes critical for enhanced market resilience. Taking an isolated view of CCs from the equities markets prism alone, disconnected from other segments, may not lead to robust market structure options. With Indian markets emerging as a favourite destination for global investments, setting the future construct of CCs supporting innovative products across asset classes and segments becomes essential. Such a construct must reckon with the contextual intricacies of the existing regulatory architecture and market structure of the Indian financial markets.
Regulatory span
Excluding markets under the IFSCA, domestic securities markets (including commodities) remain under the supervision of the SEBI. However, exchange-traded interest rate and currency derivatives products are overseen jointly by the SEBI (trading, clearing and settlement) and the RBI (product design, risk, and position limits). Further, G-Secs and forex trading and clearing in the interbank markets, facilitated through the CCIL, are under the RBI.
The Payment and Settlement Systems Act 2007 entrusts the RBI with the responsibility to regulate payment and settlement institutions in India. The Act is not applicable to stock exchanges and clearing corporations promoted by stock exchanges. Also, there are a few regulatory divergences between SEBI SECC regulations governing stock exchanges and CCPs and RBI directions for CCPs. These overlaps and divergences impede the emergence of a horizontal model of clearing catering to a wide segment of products and trading venues.
Also read: Sebi expands insider trading net
Fragmented market structure and suboptimal performance
The Indian financial markets present a fragmented situation at the clearing layer with the presence of six CCs operating in different segments with varying product remits and regulatory spans. Thankfully, the 2015 merger of FMC with SEBI led to the unified supervision of commodities derivatives and securities segments. However, highly concentrated trading activity for specific asset classes/products along with an integrated trading and clearing offering creates a monopolistic position for an exchange.
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