Interoperability

Before 2019, a broker trading on two exchanges had to clear each exchange's trades at that exchange's own clearing corporation. Its collateral, its margins and its risk sat in two separate silos that could not see each other.

Interoperability links the clearing corporations to one another instead. The broker designates one clearing corporation per business segment, and every trade it does on any exchange in that segment settles there. The clearing corporations square up between themselves behind the scenes.

The gain is that one pool of collateral now supports the whole book, and positions on one exchange can offset positions on another instead of each being margined on its own.

SEBI introduced the framework by circular CIR/MRD/DRMNP/CIR/P/2018/145 dated 27 November 2018. The clearing corporations establish a peer-to-peer link — not an ordinary membership of each other — and manage the resulting inter-CC exposure under a bilaterally approved framework, exchanging margins on a reciprocal basis.

The collateral one clearing corporation holds with another has two components: (a) margins under the existing SEBI risk-management framework (initial margin, extreme loss margin, calendar spread margin and so on), and (b) additional capital set by each clearing corporation according to the credit risk it sees in the linked clearing corporation, against which no exposure is granted.

The designation rule is the examinable one. A clearing member may hold membership of more than one clearing corporation, but can be active with only one clearing corporation per business segment at any point of time. Because the choice is made at CM-segment level, it may pick a different clearing corporation for a different segment. Custodians choose separately for each of their custodial participants, at Custodian-CP-segment level.

Take a mid-sized broker active on two exchanges in the cash segment. The figures below are illustrative — the workbook states the principle (better capital utilisation, reduced aggregate exposure) rather than a worked number.

Rs 6 crore of collateral is released, not because the broker took less risk, but because a long position built on one exchange and a short built on the other are finally being looked at as one portfolio. The broker also stops running two sets of settlement accounts, two collateral files and two reconciliation processes.

Chapter 5 (Clearing Process, section 5.2) covers interoperability immediately after novation, and the chapter's sample questions test it twice — once on the definition ("which concept allows market participants to consolidate their clearing and settlement functions at a single Clearing Corporation, irrespective of the stock exchange on which the trade is executed?") and once on the one clearing corporation per business segment limit. Learn the exclusion list too; it is the kind of detail the paper likes.

• The exclusions are examinable. Interoperability does not apply to clearing corporations operating in an IFSC, nor to commodity derivatives or tri-party repo. Order-collection schemes such as Offer for Sale, the Mutual Funds Service Scheme, buyback and tender offers, non-competitive bidding and primary bidding of Sovereign Gold Bonds are outside it, as is the Securities Lending and Borrowing Scheme.
• One active clearing corporation per segment, not one overall. A member may be with a different clearing corporation in the derivatives segment than in the cash segment. It simply cannot be active with two in the same segment.
• It links clearing corporations, not exchanges. The trade still executes on whichever exchange the order went to.
• The additional capital component of inter-CC collateral earns no exposure. It is a buffer, not usable margin.
• Do not confuse it with interoperable business continuity, the separate arrangement under which NSE and BSE act as alternative trading venues for each other during an outage.