What can regulation do to encourage competitiveness?
Brokerage fees are elevated as long as a restricted supply of exchange seats is used by exchanges in India. Hence regulators should pay attention to seat prices, and require exchanges to increase the supply of seats when seat prices rise to significant levels. There is an intuitive urge to set very high capital adequacy requirements to ensure that the risk of counterparty failure is reduced. But a fundamental fact of the counterparty guarantee of a clearing corporation is that it eliminates credit risk, regardless of the size of the company that is trading. Hence the intuitive urge to set very high capital adequacy requirements should be checked, since one of the less attractive outcomes of setting high capital adequacy requirements is low competitiveness of the industry. Position limits have been proposed as a way of preventing the damage that a large trader can cause. Position limits are particularly common in the area of commodity futures, where a short squeeze is the constant dange
