Stock Market

Trade Clearing and Settlement in Stock Markets

Clearing and settlement is a  post trade activity.

Clearing Agencies ensure trading members meet their fund/security obligations. It acts as a legal counter party to all trades and guarantees settlement for all members. The original trade between the two parties is cancelled and clearing corporation acts as counter party to both the parties, thus manages risk and guarantees settlement to both the parties. This process is called novation.

It determines fund/security obligations and arranges for pay-in of the same. It collects and maintains margins, processes for shortages in funds and securities. It takes help of clearing members, clearing banks, custodians and depositories to settle the trades.

The settlement cycle in India is T+2 days i.e. Trade + 2 days.  T+2 means the transactions done on the Trade day, will be settled by exchange of money and securities on the second business day (excluding Saturday, Sundays, Bank and Exchange Trading Holidays). Pay-in and Pay-out for securities settlement is done on a T+2 basis.

The following is the summary of trading and settlement process in India.

* Investors place orders from their trading terminals.

* Broker houses validate the orders and routes them to the exchange (BSE or NSE depending on the client’s choice)

* Order matching at the exchange.

* Trade confirmation to the investors through the brokers.

* Trade details are sent to Clearing Corporation from the Exchange.

* Clearing Corporation notifies the trade details to clearing Members/Custodians who confirm back. Based on the  confirmation, Clearing Corporation determines obligations.

* Download of obligation and pay-in advice of funds/securities by Clearing Corporation.

* Clearing Corporation gives instructions to clearing banks to make funds available by pay-in time.

* Clearing Corporation gives  instructions to depositories to make securities available by pay-in-time....