The technological infrastructure of the Indian securities market is on par with the best in the world and the Securities and Exchange Board of India (SEBI) is working on pushing through another innovation — interoperability among clearing corporations. With less than two months to go before this becomes a reality, all stakeholders are racing against time to make this venture successful.

Currently, trades executed on the NSE are cleared and settled only through NSE Clearing, transactions on the BSE are settled through Indian Clearing Corporation, and those on Metropolitan Stock Exchange through Metropolitan Clearing Corporation of India.

The clearing corporations also manage client collateral and carry out risk management.

But from June 1, market participants can clear and settle all their equity, equity derivatives and currency derivatives transactions with any clearing corporation, irrespective of the exchange on which the trade is executed.

The objective of the regulator is to protect investors and their collateral and also to bring about greater efficiency in the clearing and settlement mechanism.

In the limelight

“This is a first-of-its-kind experiment in the world as it will involve interoperability in derivatives in an end-client identified, real-time risk managed market,” said Sujit Prasad, Executive Director, SEBI, while addressing the WFE’s Clearing & Derivatives Conference in Mumbai.

SEBI’s move has created a buzz among international exchanges. Globally, interoperability has been tried on a smaller scale, but this is the first time that a mammoth derivative market that computes client-level margin requirement on a real-time basis is becoming interoperable. India could be a global trend-setter if the rollout is smooth. It is, therefore, imperative that the processes are tested well to ensure a successful launch.

The guidelines for this move were issued in the SEBI circular in November 2018 in which clearing corporations were given six months to roll out this task. However, experts think that too much haste in the roll-out is not good. Meyer “Sandy” Frucher, Vice-Chairman, Nasdaq, while speaking at the WFE conference, lauded the initiative, but wondered if six months were sufficient to execute a task such as this.

The challenges

Prior to the rollout, numerous agreements have to be signed by stock exchanges and clearing corporations regarding inter-clearing corporation links and their links with trading venues, risk management framework, monitoring of client margin/position limits, the settlement process, surveillance systems, sharing of client data, sharing of product information, default handling and the dispute resolution process.

Besides the legal part, the entire physical communication architecture will need to be re-designed and care has to be taken to ensure that there is no disruption in normal trading in the initial days. In the present system, communication pipelines are needed only between the exchange and the clearing subsidiary. But now, physical connectivity lines have to be established to enable interlinking of all the exchanges and clearing corporations. Besides this, exchanges may also have to link to resilience centres and disaster-recovery sites of other exchanges. These channels also have to be tested for latency (speed of data transmission) related problems.

Currently, talks among Indian exchanges and clearing corporations are at an advanced stage. Physical infrastructure is being laid and standard messaging protocols for inter-CCP communication are being worked out.

But the channels will need thorough testing for the kind of glitches that can happen in a real-time environment. SEBI’s Prasad said that the regulator is mindful of the challenges and intends to sit with clearing participants and solve any issues that crop up. “I am quite sure that from June 1, interoperability of CCPs will commence,” says Prasad.

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