Aims to use new subsidiary to provide end-to-end solution to clients.
With a view to consolidate its clearing and settlement business, the Bombay Stock Exchange (BSE) has created a separate company, called Indian Clearing Corporation (ICC), the structure of which will be similar to what National Stock Exchange (NSE) has. An ex-government official is likely to be appointed as the chairman of ICC in the coming days.
The National Stock Exchange (NSE) controls clearing and settlement on its platform through its fully-owned subsidiary NSCCL and has 13 banks as clearing members. It is headed by NSE Managing Director Ravi Narain.
In BSE's case, while ICC will be a fully-owned subsidiary, the BSE management made it clear at recent board meetings that the company it has in a 51:49 partnership with Bank of India (BoI) for clearing and settlement-related services will continue in its present form. In fact, BoI has been working closely with BSE in this regard for a century now.
Once a buy or sell order is placed for a share, the transaction is deemed complete only when the purchased shares' delivery takes place, or the seller receives money for the shares sold. This procedure is known as settlement and involves huge risk (in case of a default) as it requires capital adequacy and close risk management supervision.
"Taking charge of clearing and settlement will be a very positive move for BSE. Controlling how or where a security settles is worth more than actually executing the trade and it helps managing risk better. This is why exchanges that own their clearing operations tend to trade at a premium to those that do not," said a stock exchange analyst.
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Next target: Interoperability
BSE's next effort will be to push for interoperability between exchanges, which would make it easier for international market participants to register with just one clearing house. After bringing down transaction changes and making significant efforts to boost technology, both exchanges have been in a race to present themselves as end-to-end solution providers, for which they are making forward and backward integration.
This is evident from the recent moves of BSE and NSE for acquiring more stake in their respective depository service companies. While the BSE holds a controlling stake in Central Depository Services Ltd (CDSL, where it recently scaled its ownership from 38 per cent to 54 per cent), the NSE, too, owns over 25 per cent in National Depository Services Ltd (NSDL). NSE had acquired a nine per cent stake in NSDL just a couple of months ago and, according to sources, the exchange is likely to take it to over 50 per cent.
Globally, controlling depository services as well as clearing and settlement operations has become important as it undercuts the role of alternative trading systems by making the main exchanges a preferred location for listing. Also, in a scenario where exchanges are trying to consolidate, gaining control of the ecosystem will cut the takeover threat from rivals.
In Europe and US, the clearing and settlement business has sparked a major war among exchanges. When the London Clearing House announced it was merging with Euronext (which is NYSE-Euronext now), the London Stock Exchange worried that it would favour Euronext and threatened to take its business to Eurex Clearing. For a month in 2004, the future of Europe’s clearing and settlement landscape hung in the balance in 2004.
Around the same time, the Deutsche Boerse had offered LSE a stake in Eurex if it shifted its clearing operations to the Germans. In US, NYSE is one of the dominant shareholders of one of the largest depositories in world, the Depository Trust and Clearing Clearing Corporation.