Everything you need to know about interoperability

#1

SEBI vide circular number CIR/MRD/DRMNP/CIR/P/2018/145 proposed the idea of Interoperability amongst Clearing Corporations. I’ve tried to simplify this jargon-filled circular for easier understanding.

In a gist, Interoperability (IO) allows a broker to clear and settle his trades through a single clearing corporation. Zerodha Broking Limited (ZBL) is a member on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Today, trades carried out on NSE are cleared through NSE’s Clearing Corporation (NCL) and BSE’s trades are cleared through Indian Clearing Corporation Limited (ICCL).

What does clearing trades mean?

Once a trading session has ended, depending on the trading activity of the client, one the following things can happen:

a. Client has bought shares on delivery and has to pay money against such purchase
b. Client has sold shares on delivery and has to receive money against such sale
c. Client has done intraday trade and net difference is either positive (profit) or negative (loss)

In all the above cases, there’s an additional activity apart from the actual trade - the activity of debiting shares from the client (in case of sale), giving him the credit of funds (in case of sale) and crediting shares to the client (in case of purchase), debiting funds from the client (in case of purchase).

It’s the Clearing Corporation that carries out this activity. Clearing & Settlement (C&S) is essentially a backend process where the Clearing corporation debits/credits a broker’s settlement bank account depending on whether the broker’s obligation is net payable/receivable. A similar exercise is carried out for stocks also, depending on whether a broker has to deliver/receive delivery of stocks, the respective clearing corporation will debit/credit the broker’s pool account.

The existing C&S system requires brokers to keep 2 pool accounts - 1 each for NSE & BSE and 2 settlement bank accounts - 1 each with NCL and ICCL. With IO kicking in, the need for 2 pool accounts and 2 settlement accounts is eliminated. All brokers are required to appoint one Clearing Corporation (either NCL or ICCL) and clear trades of both Exchanges through one Clearing Corporation. ZBL has opted to clear it’s trades through NCL.

What changes for the client?

Netting off of trades: Today, if a client is buying stock on NSE and selling the same stock on BSE, he’s essentially creating 2 different delivery positions. 1 position where he’ll receive delivery of stocks from NSE on T+2 and one where he’s to give delivery of stocks to BSE on T+2. Since the trades are currently cleared by the respective CCs, the positions don’t get netted off.

Come July 01, the above trade will result in an Intraday position with buy in NSE netting off the sell in BSE. [Although IO kicks in on July 01, Thomson Reuters (TR), our OMS/RMS vendor isn’t still ready with this, would take upto 3 months). So on 1st July if a client buys 10 shares of Reliance on NSE (CNC) and sells 10 shares of Reliance on BSE (CNC) (provided he has holdings already), although the front end would show up as 2 trades, in the backoffice we would net off these trades and no delivery position is created. All charges as applicable to Intraday trade is applied. So STT essentially would only be charged @ 0.025% on the sell leg of the transaction.

This netting off applies to trades made in Futures & Options and Currency Derivative Contract also. Reliance Future Contract bought on NSE and Reliance Futures sold on BSE (for someone who has activated F&O trading on BSE) also results in positions getting nullified. 1USDINR long on BSE CDS would nullify against a sell trade of 1USDINR on NSE CDS (We will activate BSE CDS soon). This is the biggest change as far as the client is concerned

Slight change in ledger posting and Contract note format

Currently, if a client makes trades in NSE and BSE, he sees 2 obligation entries on his ledger, one each for the 2 Exchanges. After July 1, he sees only one entry for trades made in Equity segment (NSE+BSE), one entry for F&O and one for CDS.

Also, there’s a slight change in the contract note format. Today we group the trades based on the Exchange, from July 01, we’ll group it based on the Stock. This doesn’t really have any bearing

Why will we not allow BTST trades to happen? (for 2 days only)

So we’ll flash a message on Kite today informing clients that:

  • Stocks bought on 27th will not be allowed for selling from T1 holdings on 1st July
  • Stocks bought on 28th will not be allowed for selling from T1 holdings on 1st July & 2nd July
    (Stocks will continue to be shown on the holding page, but if he tries to sell the order will not go through. We’ll ask the Kite team to flash a message on the holding page informing them of the same)

This is because the Clearing Corporations have said that IO will start only for trades that take place from 1st July. All trades made till such date will be cleared through the respective Clearing Corporation. This means if a client has bought stock on 28th July on BSE, we will receive this from ICCL on 2nd July (as per T+2 settlement, from ICCL). If we allowed selling the same stock on 1st July (BTST), then the settlement of trades made on 1st July has to happen to NCL (Since IO has already started and trades of BSE also have to be cleared through NCL). In short, trade made on BSE has to be settled to Clearing Corporation of NSE which is a little tricky to manage, which is why we aren’t allowing BTST to happen.

Starting 03rd July, everything will get back to normal.

I know this post is lengthy and slightly technical. I’ve tried my best to explain it in simple terms :slight_smile:

7 Likes
#2

it may not be applicable /suitable for investors who have only NSE member or only BSE member to deal . thus they are dealing with 2 different brokers for 2 different exchanges.
my understanding is that it is suitable for big quantity day traders who seek doing arbitrage on price difference between 2 exchanges .

#3

28th june

#4

@VM1 i got information from , one of my ,other stock broker that , Interoperability functionality will be effective only from 15 th July 2019, as per exchange circular is it true ? if yes how it affects delivery based trade ? on ZBL

#5

:slightly_smiling_face: Still waiting for the reply!!!

#6

when start in zerodha ?