Sebi seeks to protect clearing corporations from court orders

The market regulator is looking to protect it from court orders that may come in way of executing its functions

The Securities and Exchange Board of India (Sebi) is looking to bring in rules that will strengthen the functioning of clearing corporations. Among other things, Sebi is looking to protect them from court orders which could come in the way of their functions, said a senior Sebi official.

A clearing corporation acts as the counter-party to all trades, like a buyer to every seller and seller to every buyer. When trades go through a clearing corporation, the the market is protected from a situation where transactions fail to go through because the entity at the other end has defaulted.

The regulator is now looking to empower the clearing corporation with powers to carry out the process of settlement of trades without interference. It has been exploring regulatory changes that could effect such a move, said the official cited above.

“One needs to protect clearing entities from court orders and other actions. This requires a change in the Act, which can take a long time. Meanwhile, we are looking to change other regulations which could help such entities,” said the person.

Clearing corporations are governed by the Securities Contracts (Regulation) Act, 1956. Any move to empower clearing corporations with more powers would require changes to the Act. This can be a long drawn procedure. Sebi’s efforts at increasing its own powers has been pending since at least 2009 because it requires changes to the Sebi Act as well.

The Sebi official said the move to empower clearing corporations is also an effort to bring India in line with global practices.

The Committee on Payment and Settlement Systems (CPSS), a forum for central bankers and a technical committee of the International Organization of Securities Commissions (IOSCO, an international body of regulatory organisations like Sebi) has been reviewing the standards for financial market infrastructure (FMI) institutions such as clearing corporations. The CPSS-IOSCO came out with a report on norms for institutions, such as clearing entities in April 2012, in which it suggested that such entities should enjoy a level of protection from having their process halted by a judicial order such as a stay.

“There should be a high degree of certainty that actions taken by the FMI under such rules and procedures will not be voided, reversed or subject to stays,” said the CPSS-IOSCO report.

Sebi is also looking at the principle of assets held by the clearing corporation being ‘bankruptcy remote’ or unaffected if the concerned entity goes bankrupt, said the Sebi official.

Sebi had come out with a discussion paper in April 2013, which looked at managing risks in clearing corporations.

The paper proposed steps, including incentivising Internet-based trading models, ring fencing the client’s collateral from the broker and reducing the time for settling trades (making payments and exchanging securities ) to one day or moving to the so-called ‘T+1 settlement’ as a measure to reduce overall risk in the system.

“The present system in India, as it has evolved, still has various unaddressed risks and there is scope to take further steps to mitigate them,” the report noted.

CLEARING THE AIR

• A clearing corporation acts as the counter-party to all trades, like a buyer to every seller and seller to every buyer
• Sebi to empower the clearing corporation with powers to carry out the process of settlement of trades without interference
• Sebi is exploring regulatory changes that could effect such a move
• Clearing corporations are currently governed by the Securities Contracts (Regulation) Act, 1956