Clearing Corporations and their role

Clearing and Settlement C&S) Systems has a huge role to play in making financial markets more efficient. Most of us are fascinated by traders and there are plenty of books/journals on the successful traders and their strategies. And we do not know/care about the important role C&S play in development of financial markets.

The role of C&S is all the more important as technology has been integrated with trading activity. We now have screen based trading and with just a few clicks can execute a trade in few microseconds. If C&S also does not catch up with the growing trade volumes, the entire market would collapse.

Finance Ministry of India has a nice discussion paper on the role of C&S and how the systems have evolved in India from paper based to electronic systems.

In securities market, there are three distinct activities- Trading, Clearing & Settlement and the stock exchange members did all the activities within themselves.

Now, with demutualisation of exchanges and exchanges, it is important we seperate trading from C&S activity. This would bring transparency and bring more efficiency in the markets.

Hence there is a need to establish Clearing Corporations (CC) that are specialists at this activity. As of now,  NSE (National Stock Exchange) has its own clearing corporation

The paper says in order to further the role of a CC,  there should be competition, no conflict of interest and should have appropriate risk management.

It then discusses what provisions need to be made to recognise CCs, how to regulate clearing members and their role.

The paper also invites comments/suggestions from the public. But unfortunately, the date for doing so has passed. The last date for comments was 31st July, 2007.

However, a decent paper on the topic. Prof. JR Varma (0f IIM-A) shares his thoughts on the same.

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One Response to “Clearing Corporations and their role”

  1. peter Says:

    hi,
    i cannot find the discussion paper on the finmin.nic.in site. if u have a copy of the discussion paper could u mail it to me. thanx a lot

    Regards

    Peter

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