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Interoperability in settlement of equity and currency trades is all set to disrupt the current market ecosystem with the brokers having to select any one clearing corporation to settle all their trades, irrespective of the platform where the transaction took place. This has the potential to make settlement volumes shift from one clearing corporation to another, between the three players — NSE Clearing, the Indian Clearing Corporation (attached to the BSE) and the Metropolitan Clearing Corporation of India (attached to the MSEI).
Under the old system, trades executed on the NSE had to be cleared and settled only through NSE Clearing, those on the BSE were settled through Indian Clearing Corporation and transactions on Metropolitan Stock Exchange were cleared through Metropolitan Clearing Corporation of India. Brokers transacting on multiple exchanges had to maintain collateral at multiple clearing houses, in order to settle the trades.
With brokers now being asked to choose any one clearing corporation where they can settle all their trades, which clearing house will gain market share and which one will lose?
The exact picture will emerge only after a month, but as of now, NSE Clearing has an advantage due to some obvious reasons. One, the NSE enjoys 100 per cent share in equity derivative volume, over 90 per cent share in equity cash market and almost 60 per cent of currency derivative segment. It is highly likely that the members already trading on the NSE will prefer to settle through the NSE Clearing. According to industry sources, all the brokers currently trading on the NSE have already chosen NSE Clearing as their preference.
Two, the NSE Clearing is much more robust with a far larger security guarantee fund, around ₹2,900 crore, many times larger than the fund sizes of ICCL and MSEIL.
Three, it is quite possible that some brokers who were doing a small portion of their trading through the BSE, especially in smaller stocks that are not listed on the NSE, could now select NSE Clearing for trade settlement.
While ICCL is likely to retain most of its member brokers’ settlement volume, some volume migration is possible from MSEIL to ICCL.
Why the delay?
According to the SEBI mandate, exchange-traded equity and currency market was set to move towards interoperability in settlement from the beginning of June. However, with many trading members not yet ready for the transition to the new settlement system, one more month has been given to all trading members for mandatory switching to the new system.
All the three clearing corporations were ready with their systems and connectivity for the June 3 rollout. But many members had expressed difficulty in making the transition as they had to make significant changes to their back-office processes under the new system.
The client collaterals had to be merged in one clearing corporation and all the documentation, and compliance processes had to be changed as well.
Welcome move
The additional time is welcome as it gives the exchanges time to test the system before going live. The first mock trading to test the system was conducted on June 1, when glitches were reported in connecting all the clearing corporations.
The NSE has decided to move its members to interoperability in a phased manner over this month and intends to complete the transition by July 1. The BSE moved 15 of its members to interoperability last week and intends to move others, in batches, over rest of this month.
What changes in cost
Currently, clearing corporations do not charge members anything for managing the collaterals or for settlement. They charge the exchange a certain fee for settlement. With interoperability beginning, the ICCL may be able to charge the NSE for settling trades executed on its platform or NSE Clearing could charge the BSE for settling its trades.
Ultimately, the new system is a win-win for investors as they can trade with lower collateral. Investors stand to benefit from the netting benefit which is derived by pooling all the collaterals at one clearing house. Risk management at the broker level is also easier if all the margins of a particular member are pooled in one clearing house.
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