Clearing Corporation, in simple terms, is established in order to make the transactions smoother in the stock exchanges. The stock exchanges on a daily basis have multiple transactions going on. These corporations ensure that these transactions are carried out in an efficient and smooth manner.
The work of this kind in India is done by the Clearing Corporation of India (CCIL). It was set up in the year 2001. CCIL is the organization which is responsible for clearing and settling the transaction for money market, government securities, derivatives and foreign exchange.
CLEARING CORPORATION OWNERSHIP AND ITS COMPOSITION
There are six core promoters of CCIL. They are-
(a) State Bank of India
(b) Industrial Development Bank of India (IDBI)
(c) Life Insurance Corporation of India (LIC)
(d) ICICI Bank
(e) Bank of Baroda
(f) HDFC Bank
All the above banks have collectively contributed to 50% of the equity share capital. The remaining share is contributed by primary dealers, financial institutions and banks.
The day to day operation that occurs at the CCIL is handled by the Managing Director. All the policy decisions are taken by the Chairperson and the board of directors. The MD and the Chairperson appointed in CCIL is nominated by the State Bank of India and the board of directors of CCIL.
CLEARING CORPORATION AND NOVATION
CCIL takes the help of Negotiated Delivery System (NDS) which is an online trading platform. It provides an interface to CCIL.
Now, the question arises that how this organization works. The CCIL works as a working as an intermediary between two counterparties when it involve government securities.
The work is done through a process known as novation. Under this, the CCIL acts as buyer with regard to the seller of the security and on the other hand it will act as a seller with regard to buyer of the security. This is done that the high amount of credit risk involved by either of the parties can be removed.
CLEARING CORPORATION AND RISKS
In any trading activity, usually, there are three types of risks involved . They are credit risk, operational risk and liquidity risk. Credit risk means the inability of the counter-party to fulfil its payment obligations. Operational risk is the risk which arises due to any problem in system or management control. Lastly, liquidity of risks means the inability of the counter-party to meet its contract terms due to shortage of funds.
The CCIL through the process of novation as explained earlier mitigates these risks. Through novation, instead of the original contract between the buyer and seller, there are two contracts. The two contracts are between CCIL and the respective counter-parties each.
CLEARING CORPORATION AND CBLO
CCIL manages the risk through a money market instrument which is approved by the Reserve Bank of India. It is called Collateral Borrowing and Lending Obligation (CBLO).
Under CBLO, membership is provided all the members of RBI. Also, some non-members of RBI such as co-operative banks, insurance companies etc.
All the members under CBLO, before their admission have to contribute their margin requirements. The members are required to deposit their margin requirements in Settlement Guarantee Fund (SGF). The account for the same is maintained by the Reserve Bank of India.Also, the receivable and payable from all the trading activities by the parties is settled by paying or receiving the net amount involved in the transaction from the member’s account.
REFERENCES
- https://www.ccilindia.com/SiteCollectionDocuments/Fact%20Book/2014/1-The%20Clearing%20Corporation%20Of%20India%20Ltd.pdf
- https://www.slideshare.net/vipinkjain/ccil12
- http://www.experts123.com/q/what-is-the-role-of-the-clearing-corporation-of-india-limited-ccil.html
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