Investors could soon see a drop in trading costs if market participants pass on the benefits of interoperability that will kick in from next week.
According to market participants, interoperability between clearing corporations that allows brokers to use any of the clearing corporations to settle their trades, would lower the compliance cost for market intermediaries, which in turn could lower the trading cost for investors.
It would also strengthen the risk management of the capital markets and minimise the potential systemic risk, if in case a particular clearing corporation shuts down due to a technical glitch, cyberattack or any natural cause, they said.
“The efficient allocation of funds would lead to cost-effective trades, and make exchange transactions more affordable,” said Vijay Bhushan, president, Association of National Exchanges Members of India (ANMI).
Simply put, interoperability 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, resulting in a reduction in compliance costs, and thus bringing down the trading costs as well.
Currently, the trade executed on a particular exchange is settled through the exchange’s own clearing corporation. This led to a practice wherein broker members had to keep margins with each clearing house as all equity and derivative brokers are members of the BSE and the NSE, along with the Metropolitan Stock Exchange of India (MSEI).
“Member brokers keep their funds and collateral with high buffer across exchanges and across segments. Under interoperability, they will be able to consolidate and reduce buffer, lowering their overall collateral requirement,” said Kunal Sanghavi, chief financial officer, MSEI.
“This is a big plus. Trading members will find it easy on margining,” he added.
For example, if a broker has a ₹100 crore margin in NSE’s clearing corporation, he or she can use that margin to trade on the BSE as well under interoperability. This significant reduction in margin requirements is expected to bring down overall trading costs.
The Securities and Exchange Board of India announced the regulatory framework for interoperability in November last year.
Meanwhile, interoperability also provides huge benefits in terms of the overall safety of the markets.
“Interoperability will save participants from glitches in case of problems in a particular exchange or at the broker level for a particular exchange,” said Shrinivas Viswanath, co-founder & chief technology officer, Upstox, a discount broking firm.
“So, it will separate the execution risk from the settlement risk and allow market participants to seamlessly square off their positions in case of outages of exchanges or at broker level,” he added.