With an aim to reduce trading costs, regulator SEBI came out with a framework for interoperability among clearing corporations (CCPs), which will be operationalised by June 1, 2019.
At present, different bourses have their own CCPs, which handle settlement of trades on the respective stock exchanges.
The interoperability would permit trading members to clear trades through a firm of their choice instead of going through the CCP owned by the bourse on which the trade was executed.
The framework comes after the Securities and Exchange Board of India (SEBI) board in September approved a proposal to enable interoperability among CCPs.
In a circular, SEBI said, interoperability framework will be applicable to all the recognised CCPs excluding those operating in International Financial Services Centre.
"All the products available for trading on the stock exchanges (except commodity derivatives) shall be made available under the interoperability framework," it added.
The regulator asked stock exchanges and CCPs to "take all necessary steps to operationalise interoperability at the earliest but not later than June 1, 2019".
The move assumes significance in the wake of the disruptions in the functioning of a stock exchange and the respective CCPs in recent past.
Under the guidelines, the agreements entered into by the exchanges and CCPs will include system capability, inter-CCP links, risk management framework, monitoring of client margin/position limits.
Obligation system, settlement process, surveillance systems, sharing of client data, sharing of product information, default handling process and dispute resolution process will also be part of the agreements.
In case of default by a CCP, the collateral provided by such CCP will be utilised by the non-defaulting CCP to cover losses arising from such default, it said.
To promote transparency in terms of charges levied by the exchanges and CCPs, SEBI said the transaction charges levied need to be clearly identified and made known to the participants upfront.
As per SEBI, CCPS will have to establish peer-to-peer link for ensuring interoperability. A CCP will have to maintain special arrangements with another CCP and not be subjected to normal participant (membership) rules.
The regulator said risk management between the CCPs need to be based on a bilaterally approved framework and will have to ensure coverage of inter-CCP exposures. Besides, CCPs need to exchange margins and other financial resources on a reciprocal basis based on mutually agreed margining models.
However, SEBI, in certain cases, may require a CCP to establish participant link for interoperability.
"In such cases, the CCP concerned shall become participant of another CCP (the host CCP) and shall be subjected to the host CCP's normal participant rules.
"Since the participant CCP would be posting margins with the host CCP, but would not be collecting margins from the host CCP, it shall be required to hold additional financial resources to protect itself against default of the host CCP," the regulator noted.
To manage the inter-CCP exposure in the peer-to-peer link, CCPs will have to maintain sufficient collateral with each other so that any default by one CCP, in an interoperable arrangement, would be covered without financial loss to the other non-defaulting CCP.
The collateral posted by one CCP with another CCP shall be maintained in a separate account which can be clearly identified in the name of such linked CCP, which is providing collateral, and will not be included in the Core SGF of the CCP receiving them.
In an interoperable arrangement, the stock exchange and the CCP should not be located at same venue.
To ensure real time flow of information between the stock exchange (trading venue) and the CCP, each interoperable CCP will have to put in place appropriate infrastructure including deployment of adequate servers at each of the linked trading venues.
The exchanges will have to ensure that stock brokers are mandatorily subjected to risk reduction mode on utilisation of 85 percent of the broker's collateral available for adjustment against margins.
In August 2015, the SEBI had decided to hold public consultations on a new set of norms to enable interoperability of CCPs.
An expert committee chaired by eminent banker K V Kamath had suggested about interoperability among CCPs.
Major exchanges in the country include BSE and National Stock Exchange, both of which have their own clearing corporation arms.
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