All you wanted to know about interoperability

In November last year, SEBI came up with guidelines to usher in interoperability among clearing corporations. The deadline given to exchanges was extended from June 1, 2019, to July 1 to give more time to the participants to develop the requisite systems and test-run them. The idea is being introduced with the objective of cutting costs for trading members and bringing in efficiency in clearing and settlement. While the BSE and MSEI went live on June 1 with some members opting for interoperability, the NSE has announced that it will do it in a phased manner by July 1.

Interoperability is a mechanism that allows market participants to choose any clearing corporation to settle their trades, irrespective of the exchange where they executed their trades. Currently, trades executed on the NSE are cleared and settled only through its subsidiary — NSE Clearing. Transactions on the BSE are settled through its subsidiary — Indian Clearing Corporation Ltd (ICCL) — and those on Metropolitan Stock Exchange through Metropolitan Clearing Corporation of India.

Thus, participants who trade on multiple exchanges had to necessarily arrange for margin and capital separately at each of the three stock exchanges and their respective clearing corporations. This resulted in inefficient use of capital and high costs. Hence SEBI’s decision to link all the clearing corporations in the securities market and allow consolidation of the clearing and settlement function at any one of them.

Equity and currency trading will be under the interoperability framework from next month.

All the three exchanges — NSE, BSE and MSEI — are now test-running their risk management framework and surveillance systems and instituting default handling and dispute resolution processes to ensure no disruption in normal trade when they go live with interoperability.

Once live, the Indian securities markets will be the first to bring about interoperability in the derivatives market where risk management is carried out real-time. Globally, though many bourses have tried interoperability, it has been on a smaller scale.

If India manages a smooth roll-out, it will make heads turn. Further, the move may unleash more competition for market shares among clearing corporations. Currently, almost the entire market share in futures and options and over 90 per cent in cash is with NSE’s clearing corporation. Now, with interoperability, this may change. With BSE being a listed stock, investors should watch for a boost to the revenues of ICCL.

There are several benefits for stock market investors from clearing corporations becoming interoperable.

First, it would lead to efficiency in capital deployment and save costs. An investor trading through the same broker across exchanges will be eligible for netting the benefits for his trades in a given security across the exchanges.

Traders can also play on calendar-spread margins between near- and far-month contracts between exchanges. It will open up opportunities for trade in different instruments across exchanges for an investor and get him better service from the clearing corporation which now faces more competition in the market than before.

Interoperability saves participants from glitches arising in case of problems in a particular exchange or its clearing platform. It separates the execution risk from the settlement risk thus allowing market participants to seamlessly square off their positions in case of stock exchange outages.

A win-win for market participants and investors.

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