SEBI has formed an ad-hoc Committee under Usha Thorat, to review the ownership and economic structure of clearing corporations, and to suggest measures to ensure that clearing corporations function as resilient, independent, and neutral risk managers
The 2018 report of the Committee on review of regulations and relevant circulars pertaining to Market Infrastructure Institutions (MIIs), headed by R Gandhi (referred to as Gandhi Committee), had noted that the ownership of MIIs should be dispersed and should be widely held.
With respect to clearing corporations, the committee has specifically noted that while most clearing corporations in India were 100 per cent owned by a single exchange, given that clearing corporations are risk bearing MIIs, it is highly desirable that they should be widely held.
Further, the Gandhi Committee had also noted that with the clearing corporations being sensitive and high risk-bearing and risk managing entities, listing of clearing corporations should not be permitted.
“However, it is noted the current ownership structure of a clearing corporation is dominated by the parent exchange with all clearing corporations under regulatory purview of SEBI being subsidiaries of their parent exchanges. The dominance of the parent exchange in the ownership structure invariably exposes a clearing corporation to the expectations of shareholders of the parent exchange, with the financial statements of clearing corporations being incorporated in the consolidated financial statement of the parent exchange,” SEBI said.
“ Moreover, the present norm of majority shareholding by the parent exchange in a clearing corporation makes it dependent on the parent exchange for capital infusion and augmentation of its reserves, including for any shortfall the corpus of its settlement guarantee fund. 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,” it added.
The market regulator said 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.
Also with respect to the finances of MIIs, the Gandhi Committee, after deliberating on generating income and distribution of profits by MIIs, had recommended that there should be no stipulation on the quantum of profits to be made by MIIs but monitoring of reasonableness of the charges and fees levied by MIIs should be preferred.
“Given the novation function of the clearing corporations, their role as central counterparties and as a first line regulator, the investment need for a clearing corporation towards enhancing capabilities in technology, settlement guarantee fund, human and regulatory resources cannot be overstated. Therefore, while 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,” SEBI said.
With a substantial increase in trading volumes noted in recent years and growing interest amongst a wide category of investors, particularly in derivatives segment, clearing corporations would also have to augment their settlement guarantee funds.
In this regard, it has been observed that, the clearing corporations have been primarily dependent on the parent exchange for infusion of capital towards augmenting its settlement guarantee fund. The same would also apply when there is a need for substantial capital investments for investments required in technological infrastructure, risk management or human resources, SEBI said.