Clear and away
Sep 2024
Vikram Kothari, managing director and CEO of NSE Clearing, discusses the clearing corporation’s objectives, approach to T+1 settlement and the transformational reforms undertaken by Indian capital markets
Image: nima/stock.adobe.com
NSE Clearing Limited is the first clearing corporation (CCP) in India and the first of its kind to introduce settlement guarantee. The organisation clears approximately 95 per cent of equity cash and derivatives trades in India under the CCP interoperability framework. NSE Clearing, formerly known as the National Securities Clearing Corporation Limited (NSCCL), is a wholly-owned subsidiary of NSE which is among the largest equity cash and derivatives markets in the world.
NSE Clearing Limited is the first clearing corporation (CCP) in India and the first of its kind to introduce settlement guarantee. The organisation clears approximately 95 per cent of equity cash and derivatives trades in India under the CCP interoperability framework. NSE Clearing, formerly known as the National Securities Clearing Corporation Limited (NSCCL), is a wholly-owned subsidiary of NSE which is among the largest equity cash and derivatives markets in the world.
Objectives and services
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
Risk management
Sound risk management is the highest priority of NSE Clearing. Its risk management philosophy extends beyond its own protection from various risks, and places equal emphasis on minimising the infrastructure and intermediary risk for the investor community it serves.
Core Settlement Guarantee Fund
Sound risk management is the highest priority of NSE Clearing. Its risk management philosophy extends beyond its own protection from various risks, and places equal emphasis on minimising the infrastructure and intermediary risk for the investor community it serves.
NSE Clearing maintains Core SGF in each segment, based on the methodology prescribed by SEBI. The SGF corpus is not out of members’ contributions. The minimum required corpus of the core SGF is determined using the stress test, which is designed to cover the worst-case loss in extreme but plausible scenarios in respect of the top two members causing highest credit exposure.
Collateral management
NSE Clearing has adopted the best practices laid down under the Principles for Financial Market Infrastructures (PFMI) guidelines and manages client collateral, segregated at client level — 100 million investors across various asset classes, to the tune of INR.7.2 Lakh Crores (US$85 billion).
Clearing and Settlement
considering shortening the settlement cycle in equity cash from T+2 to T+1, India is the first to successfully complete T+1 migration, in a phased manner. For migration to T+1 settlement, NSE Clearing adopted a unique approach of migrating securities phase wise, with some securities moving to T+1 every month starting with securities with least market capitalisation. This required NSE Clearing to operate two settlement cycles simultaneously, even as it was continuing settlement in the rest of the listed securities.
Technological changes were inducted to shorten the settlement cycles by a day without significantly changing the trade confirmation timings for custodians. NCL is the preferred CCP for custodians. The key challenge for overcoming the shortening settlement cycle is clearing and settlement operations for foreign investors, given time zone differences and currency conversions. NSE Clearing engaged with the intermediaries to develop processes and procedures to ensure a smooth transition.
After successful implementation across all segments, NSE Clearing shortened its settlement cycle to T+1.
While all executed trades cleared through its clearing members are electronically transferred to NSE Clearing for clearing and settlement and are settled on a T+1 basis in the cash market segment; for trades executed through its clearing members in securities eligible for optional T+0 settlement, NSE Clearing clears and settles on a T+0 basis in the cash market segment.
Other transformational improvements
NSE Clearing also undertook several other transformational reforms to improve the protection of customer assets, improve funding and market liquidity for investors, and ensure continuity of operations even under extreme operational risks.
NSE Clearing has implemented the following reforms and process improvements in the last 12 to 18 months. First, the individual segregation of collateral for all customer accounts. Second, validations to ensure that movement of customer securities in depository accounts by intermediaries are always backed by secondary market transactions. Third, trading supported by Blocked Amount in Secondary Market (UPI block facility). Finally, a unique SaaS portability model with other CCP to ensure business continuity.
Market protection
NSE Clearing engaged with depositories to initiate a unique system that ensures securities transfers do not exceed the customer and client obligations. Using customer-level data, NSE Clearing generates and provides customer level obligations to the CSDs, who restrict participants from transferring out from the customer accounts more securities than corresponding obligations.
NSE Clearing implemented maintenance of customer collateral in individual segregated accounts, for all investors, at no cost and without a need to opt in. NSE Clearing also provides a web portal available 24/7 to all customers to validate collateral amounts reported by members. NSE Clearing effectively protects customer collateral, including amount in excess of margin in case of member default. Customers are effectively protected from risk of default of participant, fellow customer, or misuse of collateral by the participant.
In order to provide further protection to the investors from the default of members — either ‘trading members’ (TM) or ‘clearing members’ (CM) — NSE Clearing introduced a supplementary process for trading in a secondary market based on blocked funds in investor’s bank account, instead of transferring them upfront to the trading member, thereby providing enhanced protection of cash collateral. This facility was provided by integrating Reserve Bank of India (RBI) approved Unified Payments Interface (UPI) mandate service of single block-and-multiple-debits with the secondary market trading and settlement process referred to as a UPI block facility. Investors have welcomed this across segments.
Technology footprints
The above-stated initiatives driven by internal and external factors require a continuous and consistent investment in several technological changes. Further in the said 18 months besides the above referred transformational changes, the scale of growth was unprecedented. As collateral accounts and settlement obligations grew from a few hundred thousands to double-digit millions, access and notifications to customers went from zero to over 100 million customers.
Software-as-a-service (SaaS)
NSE Clearing engaged in a unique software-as-aservice (SaaS) model with an interoperable CCP, to offer their systems as a redundancy to each other. In case of business disruptions, other CCPs’ systems can be activated within the recovery time objective to continue operations and resume risk management and collateral management.
While CCPs achieve business resiliency through hardware redundancy and near and remote disaster sites, such measures can only guard against physical disruptions or hardware breakdowns but not software glitches.
Further, in order to test resiliency, the intraday switch over of operations were carried out in live trading day from the primary site to the disaster recovery site through graceful shutdown. This exercise ensured that the MIIs achieved readiness in managing significant disruptions or failures at the primary site, thereby ensuring robust contingency measures are in place. NSE Clearing successfully switched its operations from the primary site to the disaster recovery site while being compliant with SEBI prescribed Recovery Time Objective (RTO) limit of 45 minutes and Recovery Point Objective (RPO) limit of 15 minutes.
Industry engagement
NSE Clearing acts as a bridge between regulators and market participants to understand the needs and expectations and develop solutions that, as far as possible, meet demands from both. NSE Clearing is a member of international associations, including the International Securities Services Association (ISSA) and CCP12.
NSE Clearing shares best practices at such forums, as well as in its interactions with the industry associations — ANMI, BBF, and CPAI — and the custodians and other market intermediaries — CDSL and NSDL — from the ideation stage, ensuring timely implementation of the regulatory changes and launch of new products. The regulators in India typically form working groups with industry and regulatory participation to develop regulatory frameworks in a consultative manner. NSE Clearing acted as a nodal agency and spearheaded nearly all of the relevant working groups to assist the regulator in drawing up regulatory frameworks.
NSE Clearing has also worked with the industry, clearing members in particular, to ensure that the regulatory frameworks, while being in accordance with the spirit with which it is drawn up, also takes into consideration practical circumstances faced by the industry. While drawing up its own operational and compliance requirements for members, NSE Clearing ensures balance of purpose and practicality. NSE Clearing works with member associations and individual members to explain any new requirements and help in compliance.
All of these initiatives have led to increased efficiency and customer protection, reduced monitoring costs, and improved market operations.
For us at NCL, robustness, consistency, transparency in risk management, market resilience, and technology solution is on the forefront of satisfying the stated objectives.
NSE Clearing Limited is the first clearing corporation (CCP) in India and the first of its kind to introduce settlement guarantee. The organisation clears approximately 95 per cent of equity cash and derivatives trades in India under the CCP interoperability framework. NSE Clearing, formerly known as the National Securities Clearing Corporation Limited (NSCCL), is a wholly-owned subsidiary of NSE which is among the largest equity cash and derivatives markets in the world.
Objectives and services
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
NSE Clearing objective is to bring sustaining confidence in clearing and settlement services, promote and maintain short and consistent settlement cycles, provide counterparty risk guarantee, and create a tight risk containment system.
Risk management
Sound risk management is the highest priority of NSE Clearing. Its risk management philosophy extends beyond its own protection from various risks, and places equal emphasis on minimising the infrastructure and intermediary risk for the investor community it serves.
Core Settlement Guarantee Fund
Sound risk management is the highest priority of NSE Clearing. Its risk management philosophy extends beyond its own protection from various risks, and places equal emphasis on minimising the infrastructure and intermediary risk for the investor community it serves.
NSE Clearing maintains Core SGF in each segment, based on the methodology prescribed by SEBI. The SGF corpus is not out of members’ contributions. The minimum required corpus of the core SGF is determined using the stress test, which is designed to cover the worst-case loss in extreme but plausible scenarios in respect of the top two members causing highest credit exposure.
Collateral management
NSE Clearing has adopted the best practices laid down under the Principles for Financial Market Infrastructures (PFMI) guidelines and manages client collateral, segregated at client level — 100 million investors across various asset classes, to the tune of INR.7.2 Lakh Crores (US$85 billion).
Clearing and Settlement
considering shortening the settlement cycle in equity cash from T+2 to T+1, India is the first to successfully complete T+1 migration, in a phased manner. For migration to T+1 settlement, NSE Clearing adopted a unique approach of migrating securities phase wise, with some securities moving to T+1 every month starting with securities with least market capitalisation. This required NSE Clearing to operate two settlement cycles simultaneously, even as it was continuing settlement in the rest of the listed securities.
Technological changes were inducted to shorten the settlement cycles by a day without significantly changing the trade confirmation timings for custodians. NCL is the preferred CCP for custodians. The key challenge for overcoming the shortening settlement cycle is clearing and settlement operations for foreign investors, given time zone differences and currency conversions. NSE Clearing engaged with the intermediaries to develop processes and procedures to ensure a smooth transition.
After successful implementation across all segments, NSE Clearing shortened its settlement cycle to T+1.
While all executed trades cleared through its clearing members are electronically transferred to NSE Clearing for clearing and settlement and are settled on a T+1 basis in the cash market segment; for trades executed through its clearing members in securities eligible for optional T+0 settlement, NSE Clearing clears and settles on a T+0 basis in the cash market segment.
Other transformational improvements
NSE Clearing also undertook several other transformational reforms to improve the protection of customer assets, improve funding and market liquidity for investors, and ensure continuity of operations even under extreme operational risks.
NSE Clearing has implemented the following reforms and process improvements in the last 12 to 18 months. First, the individual segregation of collateral for all customer accounts. Second, validations to ensure that movement of customer securities in depository accounts by intermediaries are always backed by secondary market transactions. Third, trading supported by Blocked Amount in Secondary Market (UPI block facility). Finally, a unique SaaS portability model with other CCP to ensure business continuity.
Market protection
NSE Clearing engaged with depositories to initiate a unique system that ensures securities transfers do not exceed the customer and client obligations. Using customer-level data, NSE Clearing generates and provides customer level obligations to the CSDs, who restrict participants from transferring out from the customer accounts more securities than corresponding obligations.
NSE Clearing implemented maintenance of customer collateral in individual segregated accounts, for all investors, at no cost and without a need to opt in. NSE Clearing also provides a web portal available 24/7 to all customers to validate collateral amounts reported by members. NSE Clearing effectively protects customer collateral, including amount in excess of margin in case of member default. Customers are effectively protected from risk of default of participant, fellow customer, or misuse of collateral by the participant.
In order to provide further protection to the investors from the default of members — either ‘trading members’ (TM) or ‘clearing members’ (CM) — NSE Clearing introduced a supplementary process for trading in a secondary market based on blocked funds in investor’s bank account, instead of transferring them upfront to the trading member, thereby providing enhanced protection of cash collateral. This facility was provided by integrating Reserve Bank of India (RBI) approved Unified Payments Interface (UPI) mandate service of single block-and-multiple-debits with the secondary market trading and settlement process referred to as a UPI block facility. Investors have welcomed this across segments.
Technology footprints
The above-stated initiatives driven by internal and external factors require a continuous and consistent investment in several technological changes. Further in the said 18 months besides the above referred transformational changes, the scale of growth was unprecedented. As collateral accounts and settlement obligations grew from a few hundred thousands to double-digit millions, access and notifications to customers went from zero to over 100 million customers.
Software-as-a-service (SaaS)
NSE Clearing engaged in a unique software-as-aservice (SaaS) model with an interoperable CCP, to offer their systems as a redundancy to each other. In case of business disruptions, other CCPs’ systems can be activated within the recovery time objective to continue operations and resume risk management and collateral management.
While CCPs achieve business resiliency through hardware redundancy and near and remote disaster sites, such measures can only guard against physical disruptions or hardware breakdowns but not software glitches.
Further, in order to test resiliency, the intraday switch over of operations were carried out in live trading day from the primary site to the disaster recovery site through graceful shutdown. This exercise ensured that the MIIs achieved readiness in managing significant disruptions or failures at the primary site, thereby ensuring robust contingency measures are in place. NSE Clearing successfully switched its operations from the primary site to the disaster recovery site while being compliant with SEBI prescribed Recovery Time Objective (RTO) limit of 45 minutes and Recovery Point Objective (RPO) limit of 15 minutes.
Industry engagement
NSE Clearing acts as a bridge between regulators and market participants to understand the needs and expectations and develop solutions that, as far as possible, meet demands from both. NSE Clearing is a member of international associations, including the International Securities Services Association (ISSA) and CCP12.
NSE Clearing shares best practices at such forums, as well as in its interactions with the industry associations — ANMI, BBF, and CPAI — and the custodians and other market intermediaries — CDSL and NSDL — from the ideation stage, ensuring timely implementation of the regulatory changes and launch of new products. The regulators in India typically form working groups with industry and regulatory participation to develop regulatory frameworks in a consultative manner. NSE Clearing acted as a nodal agency and spearheaded nearly all of the relevant working groups to assist the regulator in drawing up regulatory frameworks.
NSE Clearing has also worked with the industry, clearing members in particular, to ensure that the regulatory frameworks, while being in accordance with the spirit with which it is drawn up, also takes into consideration practical circumstances faced by the industry. While drawing up its own operational and compliance requirements for members, NSE Clearing ensures balance of purpose and practicality. NSE Clearing works with member associations and individual members to explain any new requirements and help in compliance.
All of these initiatives have led to increased efficiency and customer protection, reduced monitoring costs, and improved market operations.
For us at NCL, robustness, consistency, transparency in risk management, market resilience, and technology solution is on the forefront of satisfying the stated objectives.
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