InvestorQ : What is meant by interoperability and what are its implications for equity investors in India?
shrinidhi Rajan made post

What is meant by interoperability and what are its implications for equity investors in India?

Riya Dwivedi answered.
3 years ago

Interoperability has gone live in India since July 2019 as per the circular issued by SEBI. Interoperability is a mechanism that allows market participants to choose any clearing corporation to settle their trades, irrespective of the exchange where they trade. Therefore, it makes the process of clearing and settlement totally seamless. You must be aware that Clearing is the process of determining the obligations of the parties of a trade. Settlement is ensuring that the actual funds and shares reach the rightful owners. That is when you get credits to your bank account for shares sold and credits to your demat account for shares purchased.

In the absence of interoperability, the trades were exchange centric and therefore totally dependent on the clearing corporation that clears the trades. That means; trades executed on the NSE were cleared and settled only through NSE Clearing Corporation (NSCCL). On the other hand, transactions executed on the BSE were settled only through Indian Clearing Corporation Ltd (ICCL).

Interoperability has actually made the clearing and settlement process totally seamless reducing costs in the process. Here is how it will work. Take the case of an investor who trades in multiple stock exchanges. Prior to interoperability, the trader had to necessarily arrange for margin and capital separately at each of the three stock exchanges which had to be deposited with their respective clearing corporations. This resulted in duplication of margin and therefore inefficient allocation of capital by the trader leading to higher costs.

Once interoperability is totally implemented across all the exchanges, there is a link across all the clearing corporations in the securities market. This can effectively allow consolidation of the clearing and settlement function at any one of them. It also means that you don’t have to worry paying dual margins and you can put your money to more productive use.

Just to cite an instance; if you have put margin with NSCCL for buying shares on the NSE, at the time of settlement or clearing of trades on the BSE Clearing Corporation, the margin at NSCCL can also be considered. Your net margin outflow reduces due to interoperability. Even intraday trades can be closed in either exchanges now.