INTEROPERABILITY IN THE INDIAN CAPITAL MARKET

By Giri Durga Prasad

Introduction

Interoperability in capital markets was first introduced in June 2018 by the Securities and Exchange Board of India (SEBI) under Regulations 28 and 29 of the SECC (Stock Exchanges and Clearing Corporations) Regulations, 2018 framework that sought to create a mechanism for clearing corporations (CCPs) to enforce interoperability to reduce trade costs, and to enhance market efficiency and risk. By June, SEBI made interoperability a regulatory requirement, allowing market participants to select any clearing corporation for trade settlement regardless of where the trade was executed.

In November 2024, SEBI introduced further measures to enhance interoperability, which included a promise of seamless trading even during technical failures. On 1 April 2025, SEBI mandated the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) to act as alternate trading venues for each other in the event of a disruption.

What is Interoperability…?

Interoperability refers to the ability of multiple financial systems, markets, clearinghouses, and regulators to work together effectively. This initiative enhances the resilience of MIIs (market infrastructure institutions), which include stock exchanges, clearing corporations, and depositories, through the ability to sustain operations during unprecedented disruptions. In this construct, if an exchange is experiencing downtime for a product or a similar related product (single stock derivatives to index derivatives), then the market participant can hedge the position on another exchange. This can decrease risk and maintain stability in the market during a technical disruption. This has been an important milestone for capital markets in India as it introduces more flexibility, competition, and lower costs in clearing and settlement services. The interlinking of various financial systems, platforms, and technologies may have a profound impact on market participants, from retail investors to large institutional traders. As capital markets embrace digital transformation, interoperability will change trading, settlement, and regulatory processes globally. It removes the barriers and allows for the movement of data, transactions, and assets across different platforms. Interoperability can show up at various levels: 

1. Interoperability at the Exchange Level -- Different stock and derivatives exchanges work together to provide traders with seamless access to multiple markets.

2. Interoperability in Clearing and Settlement -- Central counterparties (CCPs) and clearinghouses enable smooth settlements across jurisdictions.

3. Interoperability in Technology - The existing trading algorithms, APIs, blockchain networks, and regulatory systems.

BSE and NSE as Alternative Trading Venues

In November 2024, the SEBI initiated an interoperability framework that would enhance interoperability by requiring the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) to act as trading venues for one another during times of technological failure. This initiative provides continuous trading and increases market strength in times of unexpected system failures.

One of the central purposes of the interoperability framework is to limit exposure to issues stemming from technological failures.  If one exchange were to experience a failure that resulted in an outage or operational failure, it would allow traders to quickly trade and manage their positions on the other exchange, thus ensuring a low level of interruption in trading.  According to SEBI, technology issues affect trading valued at approximately ₹20,000 crore annually. The interoperability framework will reduce the time of trading outages and protect overall market confidence, thereby strengthening confidence in the efficiency of the capital markets in India. Through the interoperability framework, if market participants are unable to transact at the original exchange in the event of a technological failure, they may hedge their positions at the alternative exchange.  For traders transacting in the same or similar products, or linked to similar products, depending on the direction of the trade from the other exchange and speed to execute in the new market, the alternative venue creates a minimal risk of loss.  In the previous fiscal year, the volume of derivatives trading executed on the NSE alone exceeded ₹1,500 lakh crore in volume.  A seamless process from one exchange to the other for trading is critical to effective markets.

The introduction of interoperability between the BSE and the NSE will also help mitigate risk within the financial ecosystem. When trading is diversified across platforms, the systemic risk is lessened, which allows clearing corporations to function more effectively. Every day, the BSE clearing corporation (ICC) and the NSE clearing corporation (NSCCL) clear trades totalling over ₹70,000 crore, and interoperability guarantees both efficiency and reliability in the safe clearance of such significant sums.  SEBI also carefully monitors this interoperability infrastructure from an enforcement and regulatory perspective in order to prevent market manipulation and unethical trading conduct. The BSE and NSE share data in real time, making it more effective to survey and enforce compliance. Over the past 12 months, more than 500 suspicious trades have been monitored by SEBI's market monitoring systems, which can be bolstered with better interoperability to further strengthen detection frameworks. This legal infrastructure ensures investors benefit from a reliable trading environment with transparency and significant enforcement accountability from regulators, thereby enhancing public confidence in our capital markets.

Regulatory Initiatives

The European Union's Target2-Securities (T2S) technology has increased interoperability between European settlement systems. The U.S. Securities and Exchange Commission (SEC) has been looking into reforms as a means to improve clearing and settlement interoperability. The market developments led by SEBI (Securities and Exchange Board of India) have improved cost efficiency and risk management, with emerging trends related to clearing corporation interoperability in the Indian capital markets. Blockchain and DLT (Distributed Ledger Technology) Interoperability solutions are in development by various blockchain infrastructure providers, including Ethereum, Hyperledger, and Polkadot, to facilitate secure asset transfers between blockchain networks. The tokenization of securities is also positioning capital markets toward interoperable digital asset markets.

Industry-Led Initiatives

There have been industry projects to integrate trading and clearing infrastructures between Nasdaq and the London Stock Exchange Group (LSEG). Financial institutions in different parts of the world have begun utilizing fintech technologies and interoperable APIs in order to create a more integrated trading environment.

Risks and Challenges of Interoperability

1. Cybersecurity Risks: As one engages in interconnectivity, one becomes more vulnerable to potential data breaches and cyber threats.

2. Regulatory Divergence: Seamless integration may be challenging to implement given the degree of divergence between different countries' compliance.

3. Technology Integration Issues: New interoperability solutions may not be straightforward for legacy systems to integrate.

Conclusion

As a result of driving innovation, reducing costs, and enhancing efficiency, interoperability is changing capital markets. While challenges still exist, the trends of advancing collaboration among market players, advancing technology, and improving regulation are paving the way to a more resilient and interconnected financial system. SEBI's proactive moves to implement clearinghouse interoperability demonstrate the importance of adjusting regulations to an ever-evolving market. As interoperability continues to evolve, it will create more opportunities for investors and market participants across the globe and increase the accessibility and efficiency of capital markets.