A giant settlement and clearing corporation, which will clear and settle transactions in all the markets -- stock, commodity, bonds and foreign exchange -- is in the works.

The umbrella corporation will also have a huge settlement guarantee fund. All the settlement or trade guarantee funds of various exchanges may be merged for this purpose.

At the moment, Clearing Corporation of India Ltd is the umbrella organisation for clearing trades in the government securities and foreign exchange markets.

In the stockmarket, National Securities Depository Ltd and Central Depository of Securities Ltd clear the transactions.

If the new corporation is set up, CCIL, NSDL and CDSL will have to be merged.

The new project is the outcome of the World Bank's efforts at putting in place a unified market clearing and settlement system.

The Bank is exploring ways to merge all other settlement guarantee funds -- National Securities Clearing Corporation Ltd, a wholly owned subsidiary of the National Stock Exchange, the Trade Guarantee Fund of the Bombay Stock Exchange and funds belonging to regional exchanges.

The new settlement guarantee fund will cover the cash and futures segments of the equities, commodities, bonds and foreign exchange markets if the World Bank project is implemented.

World Bank officials are in India and have held meetings with the Reserve Bank of India, the Securities and Exchange Board of India and the Forward Markets Commission on this issue. Besides, meetings are being held with senior stock and commodity exchange officials.

A centralised guarantee fund already exists in the US and will come into existence in the European Union. The World Bank has undertaken a project to implement it in the international markets.

According to highly placed sources, the linkage of risks and the co-relation of volatility between various Indian markets are being studied.

Based on this, the new settlement and clearing corporation and the settlement guarantee fund will be set up.

The fund will guarantee all contracts across the market, minimising risk. This is especially important when markets have settlement guarantee funds that are much lower than their turnover.

Though all the exchanges have their own settlement guarantee fund, these are not enough to cover the total market risk. If all these funds are pooled, the entire system will get adequately covered against risk.

The NSE and BSE have a total settlement guarantee fund of Rs 8,000 crore (Rs 80 billion). The other stock and commodities exchanges have a combined settlement guarantee fund of about Rs 1,000 crore (Rs 10 billion).

"Not all the markets fail at one time. Generally, the debt and equities and commodities markets have an inverse relationship. Similarly, the foreign exchange and commodity markets are inversely related most times," a source said.

The new umbrella clearing and settlement body will decide all the adequacy and margining norms. The centralised settlement guarantee fund will not only result in the margining requirements of individuals and brokers being reduced, but also in lower contribution by brokers, providing a platform for optimal use of funds.