Interoperability: Potential Game Changer for Indian CCPs

India has many stock exchanges, but trading is dominated at two main exchanges – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). BSE is among the oldest stock exchanges in the world, while NSE was established as part of India’s economic liberalization process in the early 1990s. The NSE was quick to gain market share and now accounts for around two-third of stock trading and most of derivative trading in the country. BSE was slow to react to competition in the early days, but in the last five to six years has taken steps to up its game by making major changes in its technology. Structural issues with the Indian capital market have so far limited its ability to close the gap with NSE. The Indian CCPs that clear exchange trades are owned by the respective exchanges and at present only clear trades executed at the owner exchange. National Securities Clearing Corporation Limited (NSCCL) is the CCP for NSE while Indian Clearing Corporation Limited (ICCL) is the CCP for BSE. Interoperability among CCPs at an investor level is not allowed; i.e., investors can choose which exchange would execute their trades, but cannot choose which CCP would clear them. Therefore, in spite of having multiple players in the clearing space, there is not much competition among the CCPs. The dynamics in the Indian CCP space therefore are largely driven by the competitive developments on the exchange front. The capital market regulator SEBI allowed direct market access in India in 2008 and soon afterwards allowed colocation and smart order routing (SOR). This should ideally allow investors to execute their trades at any exchange of their choice. However, most of the liquidity is concentrated at the NSE due to its dominant position. Furthermore, since almost all of derivative trading takes place at the NSE, investors tend to prefer NSE for their equity trades as well, since that allows them cross-asset margining benefits of clearing trades in different asset classes at the same CCP. Because of this, smart order routing has not picked up in India yet. Thus algo trading reached around 15% in the cash segment in NSE in 2014, but smart order routing was only around 2%. Similarly algo trading was 70% at BSE’s cash segment, but SOR was around 1%. This shows BSE (and its CCP ICCL), with its improved technology and latency capabilities, is attracting a higher share of algo trades but is still unable to capture share in smart order routing, due to unique clearing arrangements in the market. Going forward potential allowing of interoperability promises to be a significant force of change for the Indian CCPs. It would give investors the freedom to choose their CCP, and if they get better latency and pricing from ICCL, they could choose ICCL regardless of BSE’s smaller share in trading volume. SEBI is considering this and is in consultation with a range of market participants. Eventual interoperability may be a boon for BSE and ICCL, allowing it to catch up with the dominant NSE and NSCCL.
About Arin Ray

Arin Ray is an analyst with Celent's Securities & Investments practice and is based in the firm's New York office. Arin's expertise lies in capital markets where he has extensive research experience in exchange trading, clearing and settlement, brokerages, and use of technology in capital markets. In his recent consulting work, he has advised a large European financial services provider to devise their post trade (settlement) strategy, a tier 1 Japanese brokerage in their product and technology strategy, and a leading international exchange in their market entry and growth strategy in Asian markets. He has published research reports on exchange and over the counter trading, exchange strategies, and adoption of trading technology in different sub-segments of capital markets.

Arin has been quoted regularly in the media, including Reuters, Wall Street Journal, Financial Times, Dow Jones, Press Trust of India, Economic Times, Financial Express, Finance Asia, Global Investor Magazine, BusinessWeek, Business Standard, Asian Investor, Pension & Investment, Business Week, and Securities Industry News. In addition, he regularly contributes bylined articles for the financial media; his articles have appeared in The Journal of Trading, Advanced Trading, Free Press Journal, FT Asian Investment, gtnews, and Ignites Asia among others.

Arin received his MBA from the Indian Institute of Management, Bangalore and B.E. in Electronics and Telecommunication Engineering from Jadavpur University. He is fluent in English, Hindi and Bengali.

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