Last month, the Ministry of Finance in India put out a discussion paper on the regulatory framework for clearing corporations, but I got around to reading this only now.
The discussion paper says that the exchanges should have only trading members and the clearing corporation should have only clearing members. This seems to imply that the clearing members should all be professional trading members that clear for others but not for themselves. I do not see the logic for such a requirement. The large trading members would normally want to clear their own trades.
The regulatory framework is perhaps hobbled by the enabling legislation itself, but I think there is a clear need for clearing corporations to provide clearing services for a wide range of contracts including not only equities and bonds but also derivatives on equities, interest rates, currencies and commodities. The discussion paper seems to have a different take on this:
Since CCs need to have dedicated resources to meet the exigencies of settlement, it would not ordinarily undertake any other activity which can have contagion effect on the adequacy of its resources. However, it may be allowed to take up other activities not related to securities settlement with prior approval of SEBI.
Finally, the rationale for the clearing corporation to be 51% owned by exchanges is not clear. First of all, exchanges in the context of SCRA probably means only stock exchanges and thus the proposal rules out major participation by commodity exchanges. Secondly, this legislates the “silo” model of clearing and trading that is quite controversial today. It appears to rule out user owned clearing corporations. This provision could also impede competition among exchanges by not allowing an upstart exchange to gain ground by using the services of an established clearing corporation.