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The market regulator Securities and Exchange Board of India’s (SEBI) proposal to demerge clearing corporations has generated significant debate among stakeholders, particularly the exchanges. Moneycontrol spoke to several former regulatory experts, including former SEBI board members, who echo SEBI’s idea but find it premature.

“SEBI should first look at the business model of clearing corporations. Are they making enough money to sustain independently? If not, then how can they be expected to be independent from the parent exchange?” said a former SEBI board member.

He suggests that clearing corporations should generate funds not only for operational resources but also for risk management, such as the requirement of core Settlement Guarantee Fund (SGF).

Another former SEBI board member suggests, “SEBI should first look into the transaction charges part. This needs to be unbundled. This will help SEBI to understand how much money is going to exchanges and how much clearing corporations are paid out of that. This will give visibility for policy measures.”

He says this should be the first step. Next, if needed, the regulator should suggest a reasonable share for clearing corporations so that they can generate enough resources to be truly independent from the parent exchange. According to him, on the operational part, clearing corporations can easily project their funding requirements. For SGF, the stress-test-driven formula can give visibility. This will reduce the burden on parent exchanges.

Though no clear breakup of transaction charges is available publicly, some market participants suggest that the distribution ratio is currently skewed in favour of exchanges. For example, out of one rupee received as part of exchange-clearing fees in transaction charges, roughly 70 paise goes to the exchange and 30 paise to the clearing corporation.

“SEBI needs to focus here and look if exchanges are reasonable in distribution of transaction income, “says the former Sebi board member.

He points out, though, that exchanges incur huge costs to run the matchmaking platform, technological upgrades, surveillance, and compliance functions. A comparison of EBITDA and PATs of exchanges with clearing corporations will give a clear picture of the financial situation of the latter.

SEBI’s consultation paper, issued in December 2024, notes the importance of self-sufficiency. The paper says, “CCs (clearing corporations) should evolve a fee and operating structure that allows them to operate as truly self-sufficient, robust and efficient utilities that are not dependent on their shareholders for enhancing the default funds, nor for funding any new investments into technology and people.” However, there is an important caveat. “The overall fee for end investors, across exchanges and clearing corporations, would not increase,” as per the consultation paper.

Experts say the key question is how the fee structure will evolve unless exchange transaction charges are unbundled. They give the example of the Clearing Corporation of India Limited (CCIL), where CCIL and its platforms like the Clearing Corp Dealing Systems (India) charge fees separately. The platforms charge a fee for order matching, and CCIL charges a clearing fee. They note that though CCIL and CCs operate in different market segments, this can be a template for the fee structure that exchanges and clearing corporations can consider.

“SEBI in the past tried to understand the optimum fee structure of exchanges and clearing corporations, but it could not get convincing replies and data from them. The breakups shared by them exceeded the then-prevailing charges,” says a former SEBI official.

According to the consultation paper, SEBI is okay with “reasonable profit” being earned by CCs so they can give dividends, attract market talent, foster innovation, and drive efficiencies—but with governance checks and balances. So, unless SEBI studies the fee structure, it cannot reach a conclusion on reasonableness.

On SEBI’s proposal of demerging clearing corporations, former RBI Deputy Governor R. Gandhi said clearing corporations needed more flexibility to fix charges. “Clearing corporations will have the ability to fix charges for their services. Of course, the regulator will have an oversight on that.”

Gandhi headed SEBI’s committee on the review of MII Regulations and submitted the report in 2018.  “Settlement Guarantee Fund is typically contributed by the clearing members in terms of initial and variation margins, in line with the risk measured against their trades/positions. In addition, the clearing corporation additionally allocates a part of its profits,” he further added.

Another committee on strengthening governance of MIIs, headed by former SEBI Whole-Time Member G. Mahalingam, highlighted the dual role of MIIs as profit-making entities and as a first-line regulator. The report calls the business model of MIIs ‘inherently conflicting.’ It says: “Policy makers need to ponder over the appropriateness of this model and perhaps look for alternatives which would ensure a clean separation of the two roles now vested with the MIIs.” Mahalingam committee was set up in April 2022 and submitted its report in November 2022.

The committee said there was a to create separate institutions to take on the vastly different roles of a first-line regulator and a profit-making corporate entity.

One view is that clearing members (clearing brokers) should be asked to contribute to the Minimum Required Corpus (MRC) of clearing corporations because they are a source of risk to the clearing corporations. In many developed markets, contribution of clearing member contribution is crucial.

But one clearing member, on the condition of anonymity, says, “we can contribute, but exchanges must give a breakup of transaction charges and detail how much money is going to clearing and how much to exchange.”

SEBI regulations say the total contribution from members to the core SGF for each segment will not be more than 25% of the MRC of the respective segment. But usually, exchanges contribute on behalf of clearing members for their business reasons.

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