The Securities and Exchange Board of India (SEBI) has confirmed that it is reviewing options to remedy the lack of interoperability between India's two securities clearing houses, but market participants are pessimistic that regulatory action will boost smart order routing volumes in the near term.
J N Gupta, executive director of SEBI, said that the Indian securities markets regulator was “looking into clearing interoperability” at the TradeTech India conference in Mumbai on 5 April.
The need for interoperability between the clearing houses owned by India's two equities markets – the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) – has become more apparent since SEBI authorised smart order routing (SOR) last year.
SEBI initially permitted SOR in India's cash equities markets in August 2010, but then had to issue a further circular in December to clarify that routing between stock markets is allowed for all order types. However the potential savings to investors' trading costs from being able to route between exchanges in pursuit of best price is offset by India's high post-trade fees, which stem largely from the absence of interoperability at the clearing level.
Buy-side customers have told Deutsche Bank, one of less than a dozen brokers so far approved to offer SOR, that their post-trade fees may be as high as US$150 per single-stock transaction. “If they smart order route any trade worth less than around US$1 million, it's likely they will negate any improvement from smart order routing with the increase in clearing costs,” said Greg Lee, head of Autobahn Equity Asia at Deutsche Bank. The combined effect of the clarification on order types and high clearing charges means that relatively few institutional investors have registered to use smart order routing. A further barrier, according to Lee, is that many front-end trading systems used by buy-side trading desks in Asia are unable to split an order that is executed across two venues for confirmation purposes.
Both the NSE and BSE are vertically integrated exchanges that own stakes in both clearing and settlement facilities. Competition and interoperability already exists between Central Depository Services (India), the central securities depository partly owned by the BSE, and National Securities Depository, in which NSE has a stake, but there are no similar arrangements between the BSE’s Bank of India Shareholding and the NSE’s National Securities Clearing Corporation.
“It will take SEBI 18 months to two years to resolve this matter because there is no consensus on the way forward,” one conference delegate told theTRADEnews.com. While some market participants favour interoperability agreements such as those currently being forged by central counterparties in Europe, others argue that the regulator should mandate the creation of a single central clearing organisation. SEBI's Gupta said there was presently no fixed timeframe for a proposal on interoperability.
The BSE, which has a smaller share of Indian equities trading, is markedly more supportive of moves toward clearing interoperability than the NSE.
Ashishkumar Chauhan, deputy CEO at the BSE, said the current situation represented an “artificial inefficiency” in the market, adding that clearing interoperability would allow trading firms to use capital more effectively.
But the NSE's chief technology officer, Ravi Apte, warned that any interoperability arrangement would have to take into account risk management implications. Noting that risk management was currently carried out on a real-time, post-trade basis, Apte said that a central mechanism would be required in the event of interoperability to monitor potential margin breaches across both exchanges.