Sebi panel is considering higher fees for clearing houses, impacting NSE’s profits

Mumbai: In what could reduce standalone profits of the National Stock Exchange (NSE), the fees charged by its clearing corporation, which absorbs most of the risks on behalf of the exchange, would increase.

The Task Force on Financial Independence of Clearing Houses and Unbundling of Fees is turning to the view that the transaction fees of clearing corporations should be reviewed, scientifically designed and appropriately linked to the total volumes of shares settled, according to a person familiar with the deliberations.

In the stock market architecture, exchanges like NSE offer a platform where trades are broken while their clearing arms like NSE Clearing, a subsidiary of NSE, act as the legal counterparty for clearing and settlement of transactions.

An overhaul of the fee structure would mean that the NSE and other exchanges would settle for a lower share of transaction fees collected from their members and let their clearing arms (which bear the risks) get a higher share than at present, earning more and strengthening their balance sheets.

A task force set up by the Securities and Exchange Board of India (Sebi) and headed by former RBI Deputy Governor RS Gandhi is also learned to be examining a proposal that would require “clearing members” to contribute to the Settlement Guarantee Fund (SGF).

Such fund, held by the clearing corporation, is created to cover contingencies arising from the insolvency of any member or broker of the exchange. A “clearing member” is a member of a clearing corporation that clears and settles trades through the corporation. Such a member may carry out trades for his own account as well as for the account of his clients; may also clear and settle trades executed by them or other members of the exchange who choose to use the member’s clearing services. “As clearing members bring more risk, they should pay a little more than normal transaction fees. So there is a proposal for clearing members to support SGF through bank guarantees or by marking fixed deposit liens. This is being practiced in some markets,” another person said. The deliberations of the task force, which is expected to complete its report by this year, assume significance as a concrete plan to improve the clearing corporation’s financial health is seen as a prerequisite for NSE’s much-discussed IPO plan.

The panel also reviewed the findings of an internal report that said the current revenue structure of clearing corporations is not robust enough to be self-sustaining. Given their earnings stream and growth in trading volume, clearing houses could struggle to make meaningful contributions to the SGF after a few years.

Currently, NSE Clearing receives about 5-6% of the fees NSE collects from members. Revising the clearing corporation’s fee structure and linking it appropriately to volumes would increase the share to 25% or a bit more. This was originally the stake that NSE Clearing acquired during the years when NSE was led by its founder, Managing Director RH Patil. After Patil’s departure, the number has declined over the years under subsequent NSE chiefs. In some developed markets, this share is close to 50%.

As Sebi has made it clear that the fees applied to brokers will not increase – so transaction costs for investors will not increase – this would mean that the NSE will receive a reduced share of the fee pool. While at a consolidated level this would not mean any change in financials as NSE Clearing is a wholly owned subsidiary of NSE, Sebi would prefer to review and finalize the charges before NSE goes public.

“Ideally, NSE Clearing should rise from the position of having to depend on an infusion of funds from the parent company to grow SGF. It should have a strong, independent balance sheet. The path to achieve this should be set before NSE becomes a publicly traded company with multiple shareholders,” another person said.