Exclusive: To list or not to list? Merge or demerge? What’s SEBI's plan for independence of clearing corporations? Consultation paper expected soon

Market regulator Securities and Exchange Board of India (SEBI) is considering whether clearing corporations should be fully demerged from parent exchanges and divested to have diversified holding structures. According to sources, the regulator met stock exchange and clearing corporation heads a few weeks ago to discuss a proposal in this regard. The idea is to make clearing corporations independent from the parent exchanges. Currently, clearing corporations are registered as separate companies but are, in reality, totally dependent on parent exchanges for funds, technology, and human resources. As per a note circulated to exchanges and other stakeholders: “Given that clearing corporations are risk-bearing MIIs (market infrastructure institutions), it is highly desirable that they should be widely held.”

Clearing corporations are entities that help in the confirmation, settlement, and delivery of transactions. NSE has NSE Clearing Corporation Ltd (NCL), BSE has Indian Clearing Corporation Ltd (ICCL), and MCX has MCX Clearing Corporation Ltd (MCXCCL).  

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Three sources confirmed the ongoing discussions. According to the first person aware of discussions, “The thought process is that clearing corporations should be independent and strong in core settlement guarantee fund (SGF), risk management and technology related matters."

The regulator has posed certain questions, including what should be the approach: demerger or divestment? Globally, both types of models are there for clearing corporations. Major clearing corporations such as the USA's Depository Trust & Clearing Corporation (DTCC), and Euroclear, a European post-trade facilitation services company, have diversified shareholding. Other clearing corporations such as London-based LSEG company LCH, and Singapore-based SGX-DC are subsidiaries of the parent exchanges. Clearing Corporation of India Ltd a clearing entity for government securities is also a domestic example of diversified shareholding, where banks, primary dealers, and other financial institutions have ownership.

As per the Stock Exchanges and Clearing Corporations regulations (SECC Regulation) 2018, which govern the ownership and governance framework of clearing corporations, at least 51 per cent of the paid-up equity share capital of a recognised clearing corporation is required to be held by one or more stock exchanges, and no person resident in India or outside India can hold more than 5 per cent. Other categories like depositories, banking companies, insurance companies, and their foreign counterparts including foreign stock exchange can hold up to 15 per cent of the paid-up equity share capital. However, in reality, most of the clearing corporations are 100 per cent owned by the parent exchanges. So, despite the regulations allowing it, the ownership is concentrated with exchanges.

Former RBI Deputy Governor R Gandhi told Zee Business: “All market infrastructure institutions should have diversified holding." Gandhi was also chairman of one of SEBI's committees that reviewed the regulations for market infrastructure institutions. The Gandhi panel believed that since clearing corporations are risk-bearing MIIs, it is highly desirable that they should be widely held. The question is also posed that if a diversified holding route is adopted, in case of huge losses, shareholders should contribute to the core settlement guarantee fund.

Another significant question raised by regulators to the stakeholders was whether clearing corporations should be allowed to list on stock exchanges. If so, the profit motive should also be there because investors will expect dividends, which is justified but in that case, clearing corporations will pursue a profit motive which may lead to higher transaction charges. Experts say that this thought of listing in itself is a big shift from a regulatory perspective, because current regulations forbid clearing corporations from listing. Although SEBI has not specifically said it, it is in favour of or against listing but only sought views. Globally, only Euroclear is listed with around 86 per cent holding with financial institutions and exchanges.

In the past also, various committees to review the structure and regulation of market infrastructure institutions were not in favour of listing. From the Jalan committee to the R Gandhi committee to the latest G Mahalingam committee, all advised against listing. However, keeping with the changing times, regulator SEBI wants to have a fresh perspective and view of stakeholders.  

The R Gandhi committee noted that clearing corporations are sensitive and high risk-bearing and risk-managing entities, so listing clearing corporations should not be permitted. The Mahalingam committee was of the view that “clearing corporations can be considered as public utilities making reasonable profits to sustain their operations, the primary objective of all stakeholders should be that of ensuring market stability and development. Disbursing shareholder profits and capital appreciation should not be a consideration in the functioning of a clearing corporation."

Another person, who participated in the discussions, said, “It’s very unlikely that the idea of listing will garner support from stakeholders but a diversified structure may be supported by all stakeholders." The source also said: “Globally, it’s the clearing members (clearing brokers) who contribute to the capital and core SGF of clearing corporations, so clearing members should own the equity." The above person reasoned that it’s the clearing members who bring the risk to the clearing corporations so they should contribute to the risk capital. But many people Zee Business spoke to said that clearing members may not agree on this as it will be against their interest. 

The other ideas being floated include that if there should be a unified clearing corporation. But the initial view does not favour it, because it will create a monopolistic situation. However, in reality, the dominant exchange’s clearing corporation has more than 90 per cent market share. Exchanges may also not agree. In the past, an attempt to merge the international exchanges in GIFT IFSC failed due to differences of view among parent exchanges.

The regulator is also seeking views on the existing multi-asset clearing corporation model. It has also sought views on whether only people who have risk management experience should be appointed as public interest directors in clearing corporations. Public interest directors are like independent directors and their appointment is cleared by SEBI.

A third person, part of the discussions, said, “SEBI is just posing questions to stakeholders, it does not mean it has formed any concrete view but discussion paper will give a better picture." The regulator may come up with a consultation paper very soon on the same to seek wider views on the proposal, as a policy-making process, SEBI seeks views from all stakeholders and comes up with a consultation paper.  

A note floated by SEBI said, “Infusion of capital in a clearing corporation by a parent exchange might be at odds with the economic interest of an exchange and its shareholders. The said situation is significantly compounded in a scenario where the parent exchange is a listed entity. There is a need to ensure that there is no scope nor any appearance of a perverse incentive that comes in the way of clearing corporations discharging their role as independent risk managers, crucial to the securities market ecosystem."

The SEBI note also highlights the risk for clearing corporations with an increase in derivatives volume. “With an exponential growth in derivatives and derivatives being leveraged products, invariably increase the tail risk in markets," it reads. Hence, the need for resilience of a clearing corporation, especially in times of market stress, cannot be overstated.

At the time of publishing this report, queries emailed to SEBI remained unanswered.