How will the interoperability of clearing corporations affect traders?
From July 15, 2019, India’s multiple clearing corporations have become interoperable. This has been a noteworthy development for market participants as it is expected to help trading members make the efficient use of their margins besides making the settlement process more efficient. In a circular dated November 27, 2018, SEBI issued guidelines pertaining to the interoperability of clearing corporations.
What is interoperability?
In simple words, all trades in one segment can be settled through only one clearing corporation of the broker’s choice.
For example, if a broking house selects NCL (National Clearing Ltd) for equity segment then it can’t settle any trade through ICCL (Indian Clearing Corporation Limited) for the same segment. But it can choose ICCL for the other two segments i.e.derivative and commodity. Once the default clearing is finalized, the broker will inform the same to exchanges.
What the present-day practice is?
As you might be aware the two clearing corporation namely NCL and ICCL settle trades done in NSE cash segment and BSE cash segment respectively. Brokers maintain pool accounts for both the exchanges for settlement.
Let’s say, a client has sold a share in NSE cash, NSE settlement details are to be filled and BSE settlement details are required separately for the sell transaction performed in BSE cash, shares are then transferred from clients account to broker’s pool account.
Take another example. If an investor purchases 100 shares of ABC ltd in NSE cash and sells 100 shares of ABC share in BSE cash on the same day, these will be marked as two separate delivery transactions. For the trade executed on NSE, the client will receive 100 shares on the settlement day and for the BSE trade, the client will have to pay-in 100 shares of ABC on the settlement day at BSE.
What will change due to interoperability?
If a broker selects NCL as their default clearing corporation, then all trade settlements i.e. pay-ins and pay-outs will be done from NCL only irrespective of the trades done on BSE.
Traders will have a convenience of their position on an intraday basis without bothering about which exchange they have bought or sold at the time of closing the trade.
For instance, after interoperability coming into being, if a client buys 100 shares of ABC Limited at NSE and Sells 100 shares of ABC Limited at BSE on the same day, it will be considered as the intraday trade and not as two separate delivery trades.
In other words, interoperability will be beneficial in both i.e. intraday and BTST (Buy Today and Sell Tomorrow) trades.
Due to Interoperability, the difference in the prices of the same share at different exchanges (i.e. at BSE and NSE) will reduce. Consequently, it will affect arbitrage opportunities in the cash segment.
On the other hand, those eying arbitrage opportunities among different segments viz F&O (Futures and Options) and cash, will benefit as they can square up their cash position in any exchange depending on the attractiveness of prices.
Interoperability will plug one loophole…
Smart trades/investors happened to book their short term losses selling (shares they already possessed) on one exchange and buying simultaneously on another since both transactions were marked as two separate delivery transactions and NOT as one intraday transaction. With this, they also managed to avoid overnight price risk (the difference between today’s closing and tomorrow’s opening).
In effect, they showed their sell transaction as short term losses booked and buy transactions as fresh purchase.
But after Interoperability norms getting applicable, the above transaction will be treated as intraday transactions and they will not able to take the benefit of short term losses booked.
Now onwards, NRIs can’t purchase the same scrip on one exchange and sell the same on other exchange as this will treat as intraday transaction and NRIs are not allowed to do an intraday transaction. NRI investors need to take delivery of shares purchased and give delivery of shares sold.
For trades settled by custodians, CP codes and client codes need to be unique across exchanges after Interoperability.
Traders should know which clearing corporation the broker has opted for. This information would be crucial at the time of submitting Delivery Instruction Slips (DIS’) for delivering shares to Broker’s pool account.
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that: We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.