Sujoy Manna

Mumbai, June 2: Clearing Corporation of India Ltd (CCIL) has set up three committees to work out the modalities for various operational and organisational structures amongst others. The three committees, comprising mostly of the directors of the clearing house, are expected to submit the reports by September this year.

Of this, one committee is expected to work out the modalities of farming out 49 per cent of the corporation’s equity to market players including primary dealers. The intention is to broaden the shareholding pattern. Currently, only six entities — State Bank of India, ICICI, IDBI, LIC, Bank of Baroda and HDFC — have subscribed to 51 per cent of the total corpus of Rs 50 crore.

Speaking to The Financial Express, CCIL managing director MR Ramesh said, “The internal committees are working on various operational areas like deciding on the member admission fees, norms for additional shareholders, risk management system, norms for setting up the settlement guarantee fund apart from organisational infrastructure issues.”

At present, only institutions are eligible to become members of the clearing corporation. The committee would work out norms whereby other entities can also become members. This would be decided on the basis of financial and operational parameters like capital adequacy, size of the operation and prevailing risk management system.

The committee on system and other areas would consider the risk management system that would come in place. It is expected to replicate the risk management system that is prevailing at National Securities Clearing Corporation (NSCCL) with required modifications, which is the clearing house for the equity market. The committee is to decide on the various margining requirements along with the norms for settlement guarantee funds.

The margining requirements would secure the potential credit exposure through collaterals. The methodology adopted to measure the potential loss is of crucial importance. Frequency of settlement is also a factor that impacts margin requirement.

The major risks in the securities clearing and settlement system are credit risk, liquidity risk and operational risk. Credit risk can be of two types. The principal risk — where the seller delivered the security but not received payment or the buyer has made payment but not received the scrip. Such principal risk is eliminated through the use of the delivery versus payment (DVP) mechanism. This ensures that delivery is made only if payment takes place.

In a guaranteed settlement where the clearing house is the central counter party, the principal risk is transferred to the clearing house. The credit risk occurs when one party fails to perform his part of the contract.