The Securities and Exchange Board of India is weighing on a demerger of the equity stock exchanges and their equity clearing corporations (CCs) to diversify their ownership and may soon bring out a consultation paper on the same.

“There is a case to consider making the CCs truly independent and self-sufficient, with broad-based ownership, and with clearing members having a risk-based skin in the game. All this may be crucial to ensure that there is an actual and perceived level playing field across all MIIs,” SEBI Whole-Time Member, Ananth Narayan, said.

This may also be crucial to ensure that sufficient resources are readily and independently available to the CCs to invest in appropriate technology, risk management, and people, for them to continue delivering on their mandate as a key public utility and first line regulator, he said at an event held in Mumbai this week.

Clearing Corporations act as central counterparties for clearing and settlement.

While exchanges and depositories are allowed to be listed in India, CCs are not. But since the CCs are 100 per cent owned by their parent exchange, when the latter lists their CCs are also de facto listed, in that the shareholders of the parent exchange consider the consolidated financials of both the exchange and its CC. In the past, this was implicitly accepted, since the CC would only clear the trades of its own exchange.

Interoperability

Since 2018, however, India has introduced interoperability in the equities market settlement so that a CC can clear the trades of multiple equity exchanges, rather than that of the parent alone. This interoperability has improved the ease of trading and settlement for investors while allowing for better backup and redundancy in our securities ecosystem. It has also materially altered the implications of 100 per cent ownership of a CC by a single exchange, said Narayan.

As of date, the dominant equity clearing corporation, owned by the dominant exchange, clears over 85 per cent of all cash and derivative equity market trades dealt on each of the large exchanges. “In this context, 100 per cent ownership of CCs by a single exchange does raise questions of the potential for actual or perceived conflict of interest,” Narayan said..

Narayan said that SEBI had upgraded its supervision of MIIs significantly over the past few years and intends to enhance the same further, particularly by building a specialised cadre of IT supervisors.

SEBI may also get involved in approving the appointment of the Chief Technology Officer, Chief Information Security Officer, Chief Risk Officer, and Chief Compliance Officers of MIIs, just as it approves the appointment of the MD & CEO, he said.

“There is a need for able and accomplished heads of the primary MII verticals of Technology & Operations, and of Risk and Compliance. These crucial verticals must be willing and empowered to operate independent of short-term commercial considerations, to ensure that the MII delivers its primary mandate as a quality public utility and first line regulator,” Narayan said.

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