Sebi panel weighs cap on clearing house dividends

The proposal, along with a slew of other measures, was discussed in a recent meeting of the committee constituted by the Securities & Exchange Board of India (SEBI) to strengthen the balance-sheets of clearing corporations which play a critical role in the securities markets.

Serving as legal counterparties for clearance and settlement of trades, clearing houses bear the risks on behalf of exchanges.

A senior SEBI official, during an interaction with the committee, has suggested a regulatory ceiling on dividend payout by clearing corporations, two persons familiar with the ongoing deliberations told ET.

Agencies

Proposal aims to strengthen settlement guarantee funds and financial resilience of these market institutions

Other proposals examined by the panel headed by R.S.Gandhi, former deputy governor of the Reserve Bank of India, are: (1) directly crediting the interest earned by a clearing corporation from investments of the cash collateral (it receives from members) in treasury bills and government securities to the settlement guarantee funds (SGF); the fund, held by a clearing house, acts as a cash buffer to take care of contingencies arising from payment default of top stock brokers; at present, the income from these risk-free investments goes into the books of the clearing corporations; (2) exchanges sharing a bigger slice of the transaction charges collected from member brokers with clearing corporations; currently, a predominant portion of the transaction charge is retained by the exchanges unlike the practice in advanced markets;(3) framing a uniform rule for calculation of SGF across exchanges – while the NSE clearing corporation holds adequate SGF to handle the default of top 3 brokers, some of the other exchanges have a cover of 2 in the absence of any regulation. “There is no standard regulation on how the SGF would be replenished if the fund shrinks due to defaults in the market. Unlike the CCIL, there is no laid down procedure on this in stock market,” said a securities market professional. CCIL, or the Clearing Corporation of India, is the qualified central counterparty for trades in government bonds, foreign exchange, money market instruments, and derivatives like inter-rate swaps.

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“While NSE has significantly contributed to the SGF following SEBI’s directions, there are no structured regulations on how funds would be raised. Besides, listed exchange could require shareholders’ permission and meetings before making such fund commitments,” said a source. Similarly, though the quantum of dividend paid by clearing corporations is not large, there is a feeling that a rule on limiting future dividend distribution by a crucial market infrastructure institution would help as trading volume grows.

However, all this may call for a balancing act. “The SGF cannot be touched – money flowing into the fund cannot be pulled out. If all interest earnings are credited to SGF, one must factor in the possibility of the fund becoming larger than required. Instead, if the earnings or a part of it, goes to the clearing corporation, there would be greater flexibility in utilising the money in future,” said an exchange official. The entire exercise has assumed significance as financials of clearing corporations and SGFs cannot be fortified through higher transaction charges that could put off investors. “That the issues have to be addressed is widely accepted. But, since it concerns the entire industry, there is no compulsion to finalise the rules before the NSE IPO,” said another person.