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News Excerpt:

The Securities and Exchange Board of India (SEBI) is reviewing the ownership structure of clearing corporations to ensure independence and effective risk management.

About the news:

• A clearing corporation is an organization/entity affiliated with a stock exchange whose primary objective is to oversee the handling of confirmation, settlement, and delivery of transactions.
• SEBI has formed a committee chaired by Usha Thorat, a former deputy governor of the Reserve Bank of India (RBI), to suggest alternatives to ensure the capital needs of clearing corporations and to widen the list of eligible shareholders.

Existing shareholding structure:

• Clearing corporations are dominated by their parent exchanges.
• Indian Clearing Corporation (ICCL) and NSE Clearing (NCL) are wholly-owned subsidiaries of the Bombay Stock Exchange (BSE) and the National Stock Exchange, respectively.
• 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.
• According to norms, stock exchanges have to hold at least 51 percent paid-up equity share capital of the clearing corporation.
• Further, there are caps on the holdings by non-residents and individual shareholders at 5 percent, while the same for depositories and other institutions is at 15 percent.

Need for a review committee:

• The new committee may review existing norms of shareholdings and look for alternatives to meet financial obligations and investment needs.
• There is a need to ensure that there is no scope for any appearance of a perverse incentive coming in the way of clearing corporations discharging their role independently.
• The securities market has witnessed a structural change in recent times, with exponential growth in derivatives across the investor spectrum.
• Derivatives, being leveraged products, invariably increase the tail risk (Tail risk is the chance of a loss occurring due to a rare event) in markets. Therefore, the need for resilience of a clearing corporation, especially in times of market stress, cannot be overstated.