Usha Thorat Committee: Recommendations & Significance - UPSC Notes

In the most recent past, the Usha Thorat Committee had been set up by the Reserve Bank of India. This was headed by Dr. Usha Thorat, a former Deputy Governor of the RBI. The committee's primary objective was to study the Indian framework of Clearing Corporations. These were an integral part of the financial market infrastructure. The key aspects for which the committee aimed were the review of the role and functioning of regulatory frameworks governing clearing and settlements in India. Such systems are crucial for smooth, safe, and transparent execution of financial transactions in securities, commodities, and other financial assets. It valued the committee's contribution in creating the financial ecosystem and improving the risk management mechanisms in India's markets.

In the second half of the article, we will look at how this topic relates to the UPSC Civil Services Examination (CSE). Specifically, the subject matters discussed pertain to General Studies Paper III, focusing on the role of financial institutions, and economic reforms.

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About the Usha Thorat Committee

The Usha Thorat Committee's mandate was the evaluation of the current state and modes of clearing corporations in India. Clearing houses will settle transactions of securities, derivatives, and commodities markets. Clearing is so termed, as it transfers the ownership of the financial products from seller to buyer in a safe, smooth manner.

The committee was made particularly in the context of very rapid growth of financial markets in India and the need for greater robust risk management systems. Its main purpose was to find a way by which clearing corporations could become much more efficient, transparent, and shock-proof with regards to the market. This aimed at creating minimum risk, which is extremely important for maintaining the very integrity of India’s capital markets.

The committee under Dr. Usha Thorat had experts in the realm of finance, law, and market operations to ensure that their recommendations would be holistic and comprehensive.

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Background of Formation of the Usha Thorat Committee

The committee carved out by the capital markets worried about the growing financial markets of India. This was also with respect to extending financial products like securities, derivatives, and commodities. Increasingly, as these markets became dynamic, the risks related to such transactions and their settlement also increased. It called for an even better approach in the management of these risks within the financial sectors.

In this context, the apex financial regulator, the Reserve Bank of India was able to feel the need to create a body that would be able to study the existent practices, highlight the gaps in infrastructure, and recommend improvements. The founding of the committee, however, came at a time when India's financial infrastructure was evolving. New market players emerged and brought new financial products. They thereby heightened international integration of India's financial markets.

Dr. Usha Thorat is an economist with a vast legacy of experience in financial regulation. She has experience across varied issues of the economy and economic reforms, and would head this committee. It was expected that the leadership and experience would provide complete and practical review of the route taken by clearing corporations in India.

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Key Recommendations of the Usha Thorat Committee

There are major recommendations that the Usha Thorat Committee has made. These have since then been taken into account for the improvement of the regulatory framework in regard to clearing corporations in India. Some key recommendations are the following:

• The committee noted a need for improved risk management techniques that would adequately cover systematic risk. This would include suggestions to be made to the current default management devices and stipulations that clearing corporations would have sufficient capital buffers to be accounted for any disruption in the market.
• The Committee recommended greater transparency in the clearing operations of clearing corporations. Wider disclosure of operations, policy, and risk exposure of clearing corporations would guarantee more confidence in the marketplace.
• According to the committee, clearing corporations have to advance technologically. This is because of the growing complexity of the financial markets so that a transaction-settlement process could be really faster, more secure, and cheaper.
• The committee proposed that clearing corporations should occupy a more central role as central counter-parties to financial transactions. The effect would be a reduction in counter-parties' default risk, as clearing corporations would act as intermediaries in the case of default.
• Also, recommendations were made to make the regulatory framework apt for clearing corporations with better supervision mechanisms by the RBI and SEBI as well. This would assure international best practices for the entities engaged in clearing and settlement processes.
• Financial systems everywhere in the world now depend on digital platforms. Hence, the committee has also recommended bringing in some stronger cybersecurity measures for fraud, data breach, and hacking.

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Significance of the Usha Thorat Committee

The recommendation of the Usha Thorat committee is significant as it stands to improve overall stability of the Indian financial markets. Clearing corporations are the pillars of the financial ecosystem. The recommendations of the committee were intended to enhance their capabilities to respond to the steadily growing volumes and complexities of transactions in the markets of the country.

The recommendations of this committee very much helped in enhancing the safety and efficiency of the clearing and settlement systems in the country. The committee helped:

• improve risk management,
• enhance transparency and technology, and
• reduce systemic risk, thus building confidence in the financial markets.

For financial market regulators in India, the work of the committee was significant, as it provided a roadmap for the enhanced oversight of clearing corporations as well as the better alignment of such organizations' operations with international standards-important needs as India integrates deeper into the global financial system.

The committee did have a consideration with regard to some cyber security aspects of the digital financial systems. This makes it ever more relevant, considering the increased demand for secure and resilient infrastructures to protect sensitive financial data that come with rapid technological progress.

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About Clearing Corporations

Clearing Corporations serve as financial institutes for clearing and settlement of stock exchange, commodity exchange, and other market transactions. They are important in the sense that they ensure proper execution of transactions from the buyer to seller, proper payment, and transfer of securities without risk.

The main functions of clearing corporations include:

• They ensure that the securities bought and sold in a transaction are transferred between parties, ensuring that the buyer receives the securities and the seller receives the payment.
• Clearing corporations manage the risk of counterparty defaults, ensuring that if one party fails to meet its obligations, the other party does not face a loss. This is done by requiring margin money, or collateral, to be deposited by traders.
• Clearing corporations may "net" trades, which means consolidating multiple transactions into a single trade for settlement purposes. This reduces the number of transactions and simplifies the settlement process.
• Clearing corporations are nothing but intermediaries who ensure the transaction successfully settles between sellers and buyers irrespective of one party defaulting.
• In India, clearing corporations are regulated by the SEBI, or the Securities and Exchange Board of India, and thus are earmarked under strict rules to maintain the sanctity and security of the markets concerning finance.

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