Can NSE Clearing achieve financial independence before the NSE IPO?

Mumbai: Smoothing the rough edges around the much-talked-about listing plans of National Stock Exchange (NSE) could depend on how the pie is shared between the country's largest bourse and its clearing arm.

Under the market architecture, while deals are cut on the NSE platform, NSE Clearing, a wholly-owned subsidiary of the exchange, acts as the legal counterparty to clear and settle the transactions.

Since the clearing corporation absorbs the entire settlement risk and acts as a crucial intermediary between a broker receiving buy or sell orders from investors and stock exchanges offering the trade platform, the market regulator is in favour of NSE Clearing becoming financially independent.

At a meeting with public interest directors of NSE Clearing earlier this year, senior Sebi officials had proposed that the clearing corporation could examine the possibility of directly collecting fees from brokers, sources told ET. The meeting was part of a two-day conclave where regulatory officials held separate meetings with directors of market infrastructure institutions.

At present, NSE Clearing financially relies on the parent NSE which receives fees from member brokers and retains a predominant portion of the money before sharing the balance with the clearing subsidiary. While NSE carries out all the marketing, develops products and gets businesses, NSE Clearing absorbs the risks on behalf of the exchange.

Till now NSE has infused funds into NSE Clearing Corp as well as contributed for the settlement guarantee fund (SGF). But, the regulator, sources said, was of the view that there should be a mechanism for NSE Clearing to build a stronger balance-sheet on its own. (SGF, housed by the clearing corporation, is created to meet contingencies arising on account of failure of any payment by any broker member of a stock exchange.)

Since the fees brokers pay should not be raised, this could either mean NSE agreeing to share a much larger amount with NSE Clearing, or accepting lower fees and letting NSE Clearing recover the balance charges directly from brokers. At a consolidated level, this, however, may not have much impact on the valuation of NSE.

"There are two issues: First, a pure profit driven, commercial organisation-which NSE would probably evolve into post IPO-holding majority stake in NSE Clearing. Second, after listing, would NSE, with diverse shareholders, be in a position to readily pump in money into the clearing company whenever it needs as it can today? Under the circumstances, a clear path to place NSE Clearing on a stronger financial footing, could help in sorting out a key issue before the proposed NSE IPO," said a person.

Agencies

The suggestion to unbundle charges, or allowing NSE Clearing to recover fees directly from brokers, was made shortly before the former Sebi head Madhavi Puri Buch completed her term. "Sebi had not proposed this in writing, and while the suggestion has not been repeated by the regulator since Tuhin Kanti Pandey took over as the chairman, there have been discussions on what could be the optimal charge for the clearing company," said a source.

Spokespersons for Sebi and NSE Clearing did not comment on the matter.

NSE investors, impatient for an exit, have been lobbying for listing the organisation.

According to another person, it's a complex issue as untangling NSE Clearing from the parent would also require segregating technology and manpower. "Other market institutions like BSE and its clearing corporation have to be sounded out on any proposal to unbundle charges. There is also a division of opinion-me think the break-up of fees has no relevance to the general public, but others feel the charges should be transparent and disclosed," he said.

Those who advocate making NSE Clearing financially self-sustaining, point at the comparatively stronger financials of the Clearing Corporation of India (CCIL) which acts as the central counterparty providing guaranteed clearing and settlement functions for transactions in money, government securities, foreign exchange and derivatives like currency forwards and interest rate swaps. Unlike NSE Clearing, CCIL is covered by the Payment and Settlement Systems Act.