Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Regulation of Clearing Corporations

Last month, the Ministry of Finance in India put out a discussion
paper
on the regulatory framework for clearing corporations, but I
got around to reading this only now.

The discussion paper says that the exchanges should have only
trading members and the clearing corporation should have only clearing
members. This seems to imply that the clearing members should all be
professional trading members that clear for others but not for
themselves. I do not see the logic for such a requirement. The large
trading members would normally want to clear their own trades.

The regulatory framework is perhaps hobbled by the enabling
legislation itself, but I think there is a clear need for clearing
corporations to provide clearing services for a wide range of
contracts including not only equities and bonds but also derivatives on
equities, interest rates, currencies and commodities. The discussion
paper seems to have a different take on this:

Since CCs need to have dedicated resources to meet the exigencies
of settlement, it would not ordinarily undertake any other activity
which can have contagion effect on the adequacy of its
resources. However, it may be allowed to take up other activities not
related to securities settlement with prior approval of SEBI.

Finally, the rationale for the clearing corporation to be 51% owned
by exchanges is not clear. First of all, exchanges in the context of
SCRA probably means only stock exchanges and thus the proposal rules
out major participation by commodity exchanges. Secondly, this
legislates the “silo” model of clearing and trading that
is quite controversial today. It appears to rule out user owned
clearing corporations. This provision could also impede competition among
exchanges by not allowing an upstart exchange to gain ground by using
the services of an established clearing corporation.

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