The SEBI headquarters in Mumbai, India. (Photographer: Santosh Verma)

SEBI Issues Norms For Interoperability Among Clearing Corporations

With an aim to reduce trading costs, the Securities and Exchange Board of India on Tuesday came out with a framework for interoperability among clearing corporations, which will be operationalised by June 1, 2019.

At present, different bourses have their own clearing corporations, which handle settlement of trades on the respective stock exchanges.

The interoperability would permit trading members to clear trades through a firm of their choice instead of going through the clearing corporations owned by the bourse on which the trade was executed.

The framework comes after the SEBI board in September approved a proposal to enable interoperability among clearing corporations.

In a circular, the market regulator said that the interoperability framework will be applicable to all the recognised clearing corporations excluding those operating in International Financial Services Centre.

"All the products available for trading on the stock exchanges (except commodity derivatives) shall be made available under the interoperability framework," it added. The move assumes significance in the wake of the disruptions in the functioning of a stock exchange and the respective clearing corporations in recent past.

Under the guidelines, the agreements entered into by the exchanges and clearing corporations will include system capability, inter-clearing corporation links, risk management framework, monitoring of client margin/position limits.

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Obligation system, settlement process, surveillance systems, sharing of client data, sharing of product information, default handling process and dispute resolution process will also be part of the agreements.

In case of default by a clearing corporation, the collateral provided by such a clearing corporation will be utilised by the non-defaulting clearing corporation to cover losses arising from such default, it said.

To promote transparency in terms of charges levied by the exchanges and clearing corporations, SEBI said the transaction charges levied need to be clearly identified and made known to the participants upfront.

As per the regulator, clearing corporations will have to establish peer-to-peer link to ensure interoperability. A clearing corporation will have to maintain special arrangements with another clearing corporation and not be subjected to normal participant (membership) rules.

The regulator said risk management between the clearing corporations need to be based on a bilaterally approved framework and will have to ensure coverage of inter-clearing corporation exposures. Besides, clearing corporations need to exchange margins and other financial resources on a reciprocal basis based on mutually agreed margining models.

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However, SEBI, in certain cases, may require a clearing corporation to establish participant link for interoperability.

"In such cases, the clearing corporations concerned shall become participant of another clearing corporations (the host CCP) and shall be subjected to the host clearing corporation’s normal participant rules.

"Since the participant clearing corporation would be posting margins with the host clearing corporation, but would not be collecting margins from the host clearing corporation, it shall be required to hold additional financial resources to protect itself against default of the host clearing corporation," the regulator noted.

To manage the inter-clearing corporation exposure in the peer-to-peer link, clearing corporation will have to maintain sufficient collateral with each other so that any default by one clearing corporation, in an interoperable arrangement, would be covered without financial loss to the other non-defaulting clearing corporation.

The collateral posted by one clearing corporation with another clearing corporation shall be maintained in a separate account which can be clearly identified in the name of such linked clearing corporation, which is providing collateral, and will not be included in the core SGF of the clearing corporation receiving them.

In an interoperable arrangement, the stock exchange and the clearing corporation should not be located at same venue.

To ensure real time flow of information between the stock exchange (trading venue) and the clearing corporation, each interoperable clearing corporation will have to put in place appropriate infrastructure including deployment of adequate servers at each of the linked trading venues.

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The exchanges will have to ensure that stock brokers are mandatorily subjected to risk reduction mode on utilisation of 85 percent of the broker's collateral available for adjustment against margins.

In August 2015, the Securities and Exchange Board of India SEBI had decided to hold public consultations on a new set of norms to enable interoperability of clearing corporations.

An expert committee chaired by eminent banker KV Kamath had suggested about interoperability among clearing corporations. Major exchanges in the country include BSE and National Stock Exchange, both of which have their own clearing corporation arms