Sucheta Dalal :Revving Up the Bourses?
Sucheta Dalal

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Revving Up the Bourses?   

April 7, 2009

CROSSHAIRS (MoneyLIFE Issue, 23rd April 09)

 Bureaucrats in the finance ministry are using ‘national interest’ as an argument to suppress independent inquiry reports that point to gaping deficiencies in sensitive regulated entities like the depositories. Yet, when it comes to creating effective competition in the capital market arena, there is no hurry to either clear new exchanges (MCX-SX continues to wait for permission to trade in equities) to provide competition to the monopoly of the National Stock Exchange (NSE) or to ensure effective leadership at the 133-year-old Bombay Stock Exchange (BSE), whose turnover is set to shrink rapidly after cross-margining has been introduced.
Why is cross-margining such a blow to the BSE? Simple, cross-margining allows an exchange to collect a common margin across trading segments such as cash and derivatives, instead of demanding separate margins in each segment as was done until recently. This is a boon for traders, because they block up less money in margins. However, the lack of leadership at the BSE has meant that it neither has a proper clearing corporation nor has it developed a derivatives segment. Consequently, those who trade in cash as well as derivatives will obviously prefer to move their business to the NSE and pay a lower margin.
What is the solution?
Clearly, to nudge existing bourses to have effective leadership and the funds to be able to develop other market segments (including bonds and interest rate futures) and provide competition to the NSE. This competition can come from MCX-SX or the Delhi Stock Exchange or the BSE with a smart CEO.
Is anything happening on this front?
There is a tiny glimmer of hope. The MCX-SX (the only Indian exchange with a global footprint and the really serious possible competitor to the NSE) is waiting patiently for a green signal from SEBI. The BSE has suddenly decided to invite possible candidates for the CEO’s post. One of them is Madhu Kannan who has done a long stint at the New York Stock Exchange (NYSE) and was even offered the BSE top job in 2004 but had turned it down. There are three others reportedly featuring in the race. But the BSE board is showing neither seriousness nor determination to find the best person for the job and appoint him. Several suitable candidates have been met over the past few months, including Sayee Sreenivasan from the Chicago Mercantile Exchange. But nothing has come of these meetings because the BSE, which has been rudderless for months, is not willing to offer the top slot or empower the post adequately, to allow the incumbent to initiate radical change.
Won’t cross-margining alone prevent effective competition?
Yes; but it can be resolved. There are some who believe that a single clearing corporation, which acts as a utility, should collect and maintain margins across exchanges and trading segments. According to this view, it may be a good idea to merge the National Clearing Corporation as well as the Clearing Corporation of India Limited (CCIL) and put them under Dr RH Patil (current chairman of CCIL) to allow cross-margining across much wider trading segments. However, others find this view absurd and say that each exchange must be in charge of its own risk management on a real-time basis. However, as things stand, only the NSE has the facility to use the cross-margin facility effectively. The BSE does not have a derivatives segment and MCX, which is setting up its own clearing corporation, still does not have permission to launch the equity segment, making NSE the sole bourse to benefit from cross-margining.
Someone who has built high-quality market institutions says, “Frankly, even today, the BSE can easily regain its position of strength because it is more friendly with its members, especially at the junior levels. At the NSE, officials have created fiefdoms and still do not treat members or investors very well.” The BSE is also on a high because it is being wooed both by MCX and the NSE for possible collaboration. But its survival would depend on revamping its organisational structure (maybe with the help of a consulting firm) and clarifying the chain of command and functional responsibilities; only then can it revive its business, says this source.

-Sucheta Dalal


-- Sucheta Dalal