Government of India Volume I: Analysis and Recommendations

FOUNDATIONS OF CONTRACTS AND PROPERTY
Table of Recommendations 13.3 Exemption for derivative contracts
1. Notwithstanding section 30 of the Contract Act, 1872, a derivative contract is enforceable if it is exchange
traded or entered into between sophisticated counterparties;
2. If a financial service firm is able to prove that it transferred any security, deposit or obligation to a legally
recognised nominee or to an executor or liquidator, it should be immune from being made a party to any
dispute about the inheritance or bankruptcy of a person.
disputes over securities should not involve the depository where a deceased person had
kept securities. Similar issues are found in bank accounts and insurance contracts. This
requires the laws to create a clear ‘safe-harbour’ for financial service firms as long as they
transfer the securities to a nominee, or a court appointed executor, liquidator. The Commission
states that this does not change any substantive provision in the inheritance laws
of any person but merely clarifies the duties of financial firms in specified event.
The detailed recommendations of the Commission on securities are summarised in
Table 13.3.
13.3. Infrastructure Institutions
There are certain activities associated with organised financial trading which are unique
and different from the usual activities rendered by any other financial service provider in
the financial market.
13.3.1. Different types of Infrastructure Institutions
Infrastructure Institutions are a product of the historical development of the financial sector
markets. As use of technology and complexity of the financial sector increases new
types of Infrastructure Institutions will develop within the financial sector. The Commission
reviewed the requirement for designation as Infrastructure Institutions and listed the
following activities in the financial sector at present:
1. Multilateral Payment Clearing System: Which is a mechanism to transfer value between
a payer and a beneficiary by which the payer discharges the payment obligations
to the beneficiary. Payments enable two-way flows of payments in exchange
for goods and services in the economy;
2. Exchanges: Exchanges are organisations which allow a number of parties to trade
securities amongst themselves. They create rules for trading, monitor parties to
prevent abuse, ensure declaration of relevant information, keep record of transactions
and manage risks arising out of the transactions;
3. Clearing and settlement: Clearing is the calculation of the obligations of counterparties
to make deliveries or make payments on the settlement date. The final
transfer of securities (delivery) in exchange for the final transfer of funds (payment)
in order to settle the obligations is referred to as settlement. Once delivery and
payment are completed, the settlement is complete;
4. Title storage: Securities be kept in physical or de-materialised form. Securities accounts
are maintained to reduce the costs and risks associated with the safekeeping
and transfer of securities;
5. Counter party default management: The risk that the counter party to a financial
transaction may default on its promise and thereby jeopardise the entire transaction
is minimised by imposing a Central Counter Party (CCP). This CCP acts as a
buyer to the seller and a seller to the buyer only for the purpose of settlement;
122 FINANCIAL SECTOR LEGISLATIVE REFORMS COMMISSION