India’s central counterparties

India’s central counterparties

Subject: Economy

Context:

The EU’s financial markets regulator and supervisor–the European Securities and Markets Authority (ESMA), said six of India’s central counterparties (CCPs) would be de-recognised in accordance with the European Market Infrastructure Regulation.

Details:

The six institutions on ESMA’s list are The Clearing Corporation of India (CCIL), Indian Clearing Corporation (ICCL), Multi Commodity Exchange Clearing (MCXCCL), and NSE Clearing (NSCCL), India International Clearing Corporation (IFSC) (IICC) and the NSE IFSC Clearing Corporation (NICCL).

Concept:

A counterparty (sometimes contraparty) is a legal entity, unincorporated entity, or collection of entities to which an exposure of financial risk may exist.

Within the financial services sector, the term market counterparty is used to refer to governments, national banks, national monetary authorities and international monetary organisations such as the World Bank Group that act as the ultimate guarantor for loans and indemnities.

Also within financial services, counterparty can refer to brokers, investment banks, and other securities dealers that serve as the contracting party when completing “over the counter” securities transactions.

Example:

• The Clearing Corporation of India (CCIL), supervised by RBI,
• Indian Clearing Corporation (ICCL), Multi Commodity Exchange Clearing (MCXCCL), and NSE Clearing (NSCCL), supervised by Sebi;
• India International Clearing Corporation and the NSE IFSC Clearing Corporation (NICCL), supervised by the International Financial Services Centre Authority (IFSCA).

Clearing Corporation of India Limited (CCIL)

• CCIL was set up in April 2001 by banks, financial institutions and primary dealers, to function as an industry service organisation for clearing and settlement of trades in money market, government securities and foreign exchange markets.
• The Clearing Corporation plays the crucial role of a Central CounterParty (CCP) in:
  • The government securities,
  • USD –INR forex exchange (both spot and forward segments) and
  • Collaterised Borrowing and Lending Obligation (CBLO) markets.
  • CCIL plays the role of a central counterparty whereby the contract between buyer and seller gets replaced by two new contracts – between CCIL and each of the two parties. This process is known as ‘Novation’.
    • Through novation, the counterparty credit risk between the buyer and seller is eliminated with CCIL subsuming all counterparty and credit risks.
  • In addition to the guaranteed settlement, CCIL also provides non guaranteed settlement services for National Financial Switch (Inter bank ATM transactions) and for rupee derivatives such as Interest Rate Swaps.
  • CCIL is also providing a reporting platform and acts as a repository for Over the Counter (OTC) products.

Indian Clearing Corporation Limited

It was incorporated in 2007 as a wholly owned subsidiary of BSE Ltd. (“BSE”). ICCL carries out the functions of clearing, settlement, collateral management and risk management for various segments of BSE. ICCL undertakes to act as the central counterparty to all the trades it provides clearing and settlement services for.

Multi Commodity Exchange Clearing Corporation Limited (MCXCCL) has entered into an agreement with Multi Commodity Exchange of India Ltd (MCX), for providing Clearing and Settlement services to MCX.

NSE Clearing Limited (National Clearing) formerly known as National Securities Clearing Corporation Limited (NSCCL), a wholly owned subsidiary of NSE, was incorporated in August 1995. It was the first clearing corporation to be established in the country and also the first clearing corporation in the country to introduce settlement guarantee.