Financial market regulator SEBI has formed a committee to review the ownership and economic structure of clearing corporations and suggest measures to ensure that those entities function as resilient, independent, and neutral risk managers.
The ad-hoc committee will be chaired by Usha Thorat, who was a former Deputy Governor of the Reserve Bank of India (RBI).
The market regulator said given the substantial growth of Indian securities markets in recent years, clearing corporations as central risk management institutions are important.
A 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 had 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.
Subsequently, SEBI had laid down norms for ownership and governance framework of clearing corporations. It suggested that at-least 51 per cent of the paid-up equity share capital of a recognised clearing corporation to be held by one or more stock exchanges; no person resident in India or outside India, other than stock exchanges, can hold more than 5 per cent of the paid-up equity share capital; and some other categories (depository, banking company, insurance company, their foreign counterparts including foreign stock exchange) can hold up to 15 per cent of the paid-up equity share capital.
SEBI today noted that the current ownership structure of a clearing corporation is dominated by the parent exchange with all clearing corporations under regulatory purview of it 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,” it noted.
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, SEBI added.
“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 cautioned. The said situation is significantly compounded in a scenario where the parent exchange is a listed entity.
The securities market has also witnessed a structural change in recent times, with an exponential growth in derivatives, across the investor spectrum.
SEBI asserted that derivatives being leveraged products, invariably increase the tail risk in markets.
“Therefore, the need for resilience of a clearing corporation, especially in times of market stress cannot be overstated. The growth of market in recent years also means that the largest of market players and intermediaries have an implicit stake in resilience of a clearing corporation, i.e. ensuring that a clearing corporation is capitalized and capable of handling the inherent risk, which may be exacerbated during times of market stress,” said the market regulator.
Globally, it is observed that some of the major clearing corporations such as DTCC and Euroclear have diversified shareholding while some other clearing corporations such as LCH and SGX-DC are subsidiaries of the parent exchanges.
