The Multi-Commodity Exchange is setting up a clearing corporation, a 100 per cent subsidiary, to look after the clearing of trading orders floated by members and clients.
The corporation, christened MCX Clearing Corporation, is likely to start functioning next month.
Confirming the development, Joseph Massey, managing director of the exchange said, "We are in the process of sorting out a couple of things and therefore, the date of commencement of the corporation's operation has not yet been determined." However, the corporation will not take too long to become operational, he added.
So far, the exchange's clearing activities are controlled by an integrated clearing house which remains a function of the exchange platform.
Asked of the equity structure and future disinvestment plan, if any, Massey said the clearing corporation would remain the 100 per cent subsidiary of MCX.
However, the exchange is open to any equity participation proposal, he added.
The activities of the clearing corporation will include risk management, taking stock of pay-in and pay-out, collateral maintenance, co-ordinating with clearing banks and other support institutions, and settlement accounting.
The corporation will also impose special margins, follow-up for over-utilisation of margins, follow-up mark to losses, initiate square-up of positions in either case, levy of collection of penalties with regard to settlement dues.
Unlike the clearing house which is an integral part of the futures trading platform, clearing corporation would take an independent view on the responsibilities conferred on it.
Internationally, clearing corporation does not have any linkage with the futures trading platform which helps in taking a call on every trade independently. Trades are guaranteed and clearing functions help in improving confidence of market participants and thereby improve the breadth and liquidity of markets.
Lack of capability to support large scale hedging stems from vulnerability of futures open interest to systemic risks induced by contracting parties and participants. Systemic risks -- a combination of credit risk and liquidity risk -- have an adverse effect on the capability of exchanges to support large scale hedging. Clearing corporation gives capability to the exchange to manage systemic risk to support large scale hedging, a trader said.
The centralisation of risk management at the level of the clearing house is principally beneficial to clearing members. Clearing Corporation offer efficiencies of a large magnitude in the containment and mitigation of credit and liquidity risk.
Elimination of counterparty credit risk gives exchanges and participants an opportunity to trade without having to continually assess the risk that counterparty would default on its obligations, he added.
