Higher Settlement Guarantee Outgo Is A "Good Problem," Says BSE. Here's Why

BSE Ltd.'s bottom line saw a sharp 37% fall in the third quarter, but the bourse sees the main cause of this as a "good problem."

Asia's oldest exchange saw its third quarter operating expenses rise to Rs 567 crore on the back of a higher contribution to the core settlement guarantee fund. This contribution, to the tune of Rs 199 crore, accounted for 35% of the total operating expenses. This amount was Rs 19 lakh for the previous quarter as per the company's consolidated balance sheet.

The higher contribution is on account of Sebi's new methodology from October 2024, which detailed the computation of the minimum required contribution for the equity derivative segment, BSE explained in a post-earnings call with analysts.

"They are all good problems to have because if the volumes are increasing, it means that you are getting more and more members. And because of that, you are putting more money into the core SGF," said chief executive Sundararaman Ramamurthy.

Ramamurthy said that a rising SGF contribution does not worry him because it implies the creation of a permanent revenue stream.

Ramamurthy's comments come amid the National Stock Exchange Ltd.'s claim that its subsidiary NSE Clearing failed to meet SEBI-mandated liquidity requirements for the core SGF, due to non-payment by BSE. The NSE arm reported a shortfall of Rs 177 crore in its liquidity, a deficit it said was primarily due to the non-receipt of Rs 312 crore in dues from BSE.

"Clearing and settlement is a very important part of the MII framework in handling transactions and therefore an integral part of market efficiency," Ramamurthy told analysts on Thursday.

Liquidity requirements hit BSE harder than NSE under agreements that are a part of the 2019 interoperability framework.

Under the framework, any trade executed at either exchange can be settled at both BSE or NSE's clearing houses—the Indian Clearing Corp. and NSE Clearing, respectively. Simply put, the framework allows trades to be cleared through a clearing firm of the trader's choice rather than keeping them restricted to the clearing house affiliated with the exchange where the trade was executed.

But in the country's stock markets, most trades go through NSE Clearing rather than ICCL. The interoperability framework says that as the turnover of trades increases, the fee charged on it reduces.

Along with this, Ramamurthy said, Sebi also came out with a new methodology for risk-based liquidity requirements for clearing houses in October 2024, which mandated clearing houses to maintain sufficient liquid assets to ensure financial stability.

This meant that as BSE's average daily premium turnover for the quarter continued to see a quarterly increase, it had to consequently set aside a larger portion of its assets for maintaining the minimum required contribution to the core SGF.

In its post-earnings call with analysts, BSE said that it is difficult for the bourse to forecast the SGF outgo for each quarter, but the regulator's new methodology led to the rise in contribution to Rs 199 crore from Rs 19 lakh in the previous quarter.

Between BSE, NSE and CDSL, the former is the only market infra institution whose topline did not see a contraction despite Sebi's F&O curbs and a prolonged market correction.

BSE said that as volumes in open interest increase, core SGF contribution is also likely to increase for the exchange.

"Whilst the road ahead will not be without challenges, we are optimistic about 2025," Ramamurthy said.

The company said that it expects a regulatory directive to take effect, which will provide a level playing field in the equity market segment.