Brokers, serving as clearing members for stock transactions, are required to keep collaterals – in the form of fixed deposits, bank guarantees, securities, and cash – with the stock clearing corporations.
Over the years, half a dozen banks, specialising in capital market exposures with their dealing with brokers and investors pledging stocks to raise funds for trades, have captured the market.
As a result, these banks have ended up holding a predominant value of the FDs and securities and issuing guarantees given as collaterals with the clearing corporations.
Now, the Securities & Exchange Board of India (Sebi) is examining whether this should change and to what extent it poses a risk.
“The crisis faced by two years ago was a kind of wake-up call. What if a bank holding a sizable part of the collateral ran into trouble? What if such a bank faces a run and is put under moratorium by RBI (The Reserve ) to ringfence the banking system? Such a situation can block the collaterals, freeze trade limits, and affect the wider market,” a senior banker told ET.
Subsequently, it was felt that such a risk could be significantly minimised if the collaterals are spread across the banking industry, including large public sector banks. According to market sources, the subject was discussed by the Risk Management Review Committee (RMRC) earlier this year, and has recently been taken up within Sebi.
“It was felt that a clearing corporation should not face any kind of concentration of risk. It should be able to encash collateral if a member broker or its clients faces problems,” said the person. A clearing corporation acts as an intermediary between a broker (taking orders from traders and investors to buy or sell securities) and a stock exchange (providing the platform where trades are cut). By taking all counterparty risks on behalf of the exchange, it has been at the heart of the clearing and settlement system ever since Sebi ringfenced the exchange only for trading purposes. A step towards any possible measure towards mitigating such risks may come out with an uniform set of rules that all clearing corporations must follow while accepting collaterals.
“For instance, a clearing corporation can cap the total value collaterals at a certain percentage of the net worth of a bank. Or link the cap with other parameters such as the bank’s rating, track record etc. A few clearing corporations may have adopted such internal guidelines but there are no standard regulations. So, we believe,” said a banker.
