Govt Proposes Formation of Common Clearing Corp for Commexes

New Delhi
Govt Proposes Formation of Common Clearing Corp for Commexes

The Finance Ministry has sought public comments on a proposal to set up a common 'Clearing Corporation' for national commodity bourses in order to reduce transaction cost of market participants as well as strengthen risk management systems.

At present, national commodity exchanges have integrated online facilities for trading, clearing and settlement of futures contracts.

Only one exchange -- NCDEX -- has set up a Clearing Corporation which is a 100 per cent subsidiary of the exchange, for clearing and settlement of trades executed on the exchange.

All other national bourses have clearing and settlement functions as a division of the exchanges. The contracts are cash settled or settled by physical delivery at expiration.

In a report submitted to the Finance Ministry, the Working Group has recommended an independent common Clearing Corporation (CC) for the national commodity exchanges after studying various vertically integrated models of trading, clearing and settlement.

The public views on the report are sought by next month.

The Group has suggested setting up of an independent CC with a minimum net worth of Rs 100 crore to begin with, which should be reassessed after a period of one year.

The clearing and settlement of trades within the CC should be across commodity exchanges, for benefits of reduced collateral, cross margining, multilateral netting etc to flow to the participants.

Since the commodity bourses have expressed apprehensions of the impact on their profitability if the clearing functions are performed by another entity, the Group has suggested that the CC may allow the exchanges to retain their contribution to the 'Settlement Guarantee Fund' with them, for a pre-defined period, after creating a suitable exposure mitigation vehicle.

"This will provide cushion to the exchanges in their transition to the new model," the report said.

The Group also said that CC's risk management framework should be consistent with updated principles of the Committee on Payment and Settlement Systems (CPSS) and International Organisation of Securities Commissions (IOSCO) for Financial Market Infrastructures, released in April 2012.

The Forward Markets Commission (FMC) and the Risk Management Group constituted by it may frame the modalities for the implementation of the principles, it added.

Since warehousing is an integral part of the settlement process of commodity futures contracts, the Group said the CC should coordinate with the Warehousing Development Regulatory Authority (WDRA) and state governments and put in place a document stipulating the standard operating procedures, including the delivery mechanism for contract specifications designed by the exchanges.

To mitigate the challenges associated with physical warehouse receipts, the Group recommended that WDRA should immediately establish or facilitate the establishment of an independent Electronic Registry for negotiable warehouse receipts (NWRs).

The Group also recommended that a portion of government procurements and distribution should be done through electronic warehouse receipts or NWRs to promote early adoption of e-registry in the country.

The banks/financial institutions/non-bank financial companies could also use the e-registry for collateral lending/commodity-related financing.

Stating that the common CC needs to have an efficient and speedy dispute resolution mechanism, the Working Group recommended that necessary legal amendments may be made to provide a clear legal basis for setting up and regulation of a common clearing corporation, including netting, novation etc, and for redressal of complaints against the CC.

Internationally, the Group said the in-house clearing model as well as independent clearing corporation model are widely prevalent.

In the Indian stock market, the clearing and settlement of the derivative transactions executed on the stock exchanges are being carried out by the clearing corporations, promoted by the respective stock exchanges.

The trades executed on the three National level exchanges -- NSE, BSE and MCX-SX -- are cleared and settled by their respective clearing corporations.

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