'Implementation of SEBI’s interoperability framework is a win-win for all'

Marking the entry of Indian stock exchanges and clearing corporations into the league of global hi-tech, interconnected markets, the long-pending interoperability framework for clearing corporations (CCPs) prescribed by SEBI in November 2018 was finally implemented on June 3.

The first trade under the new regime was registered on MSE’s Equity cash segment, which was settled through BSE’s ICCL and other trades on MSE were settled through Metropolitan Clearing Corporation of India Limited (MCCIL).

The official launch of the interoperability framework is perhaps one of the biggest capital markets reforms since the introduction of dematerialised settlements and derivatives trading through exchanges in the early 2000s.

The stock market regulator Securities and Exchange Board of India (SEBI) had laid down the guidelines for a world-class interoperable framework for the clearing corporations in November 2018.

SEBI's interoperability framework for CCPs necessitated linking of multiple clearing corporations to allow “market participants to consolidate their clearing and settlement functions at a single CCP, irrespective of the stock exchange on which the trade is executed.”

Operationalizing such an inter-linkage was a very complicated and hi-tech process, as it entailed interconnecting all three stock exchanges and clearing corporations and marrying their technologies and systems seamlessly.

Therefore, this is one of the biggest changes in the history of Indian exchanges since the introduction of dematerialised settlements and derivatives trading through exchanges in the early 2000s.

But this time around, this change may be even bigger and better as it is a giant leap towards the creation of “one market” involving multiple players.

Interoperability among Clearing Corporations will benefit all stakeholders, particularly brokers and exchanges.

With interoperability now in place, trading members not just get to clear their trades through a clearing corporation of their choice but it also about choosing their risk management. Interoperability would help members to consolidate their settlement activities in one Clearing Corporation. It would lead to higher netting efficiency by reducing the funds and securities pay in obligation. Interoperability would also reduce membership costs, as to benefit from arbitrage in prices between two exchanges.

It would help in reducing systemic risk, encourage innovation, facilitate competition and align the risk management framework with industry best standards.

More importantly, this provides a level playing field to all players, exchanges and clearing corporations with more options left with customers. It is a step towards healthy competition of clearing corporations.

In global markets, Interoperability of Clearing Corporations is not only a well-established practice but has yielded positive results for investors and other stakeholders.

With the new framework now operationalised in India, the coming months would be a test of resilience and robustness of Indian exchanges and how we are able to make the best of this global best practice.

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