Clearing and Settlement

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  • Clearing refers to the process of comparing trades before settlement date or the determination of the net obligation of the broker participants (for both securities and cash)
  • The settlement process refers to the exchange of cash and securities on the contractual settlement date. The settlement date can be agreed upon at trade execution or can be prescribed by local trading conventions

Clearing and Settlement mechanism in India has witnessed several innovations wiz

  • State-of-art information technology,
  • Compression of Settlement Cycle,
  • Dematerialization and electronic transfer of securities,
  • Securities lending and borrowing,
  • Professionalization of trading members,
  • Fine-tuned risk management system,
  • Emergence of clearing corporations to assume counterparty risk etc.

Transaction Cycle

A transaction cycle depicts the steps followed by a client in order to execute a trade wherein a buy order matches with a sell order.

  • Step 1:  Decision to trade
  • Step 2:  Placing Order
  • Step 3:  Trade Execution
  • Step 4: Clearing of trades
  • Step 5: Settlement of trades
  • Step 6: Funds/Securities
DAY Timings Job Performed
T (Trade Day) 9:55 a.m to 3:30 p.m Buy/Sell securtities
T+1 By 11:00 a.m. Confirmation of all trades
By 1:30 p.m. Processing and downloading of files to brokers/custodians
T+2 By 11:00 a.m. Pay-in of securities and funds
By 1:30 p.m. Pay-out of Securities and Funds

Why Clearing?

Clearing is necessary for the matching of all buy and sell orders in the market. It provides smoother and more efficient markets.

  • Parties can make transfers to the clearing corporation, rather than to each individual party with whom they have transacted.
  • The agency reports discrepancies to traders in case the reports do not match, who then try to resolve them.
  • It ensures that trades are settled in accordance with market rules by managing past trading and pre-settlement credit exposures.

Settlement

Settlement takes place once clearing process in performed.

  • The settlement agency receives cash from buyers and securities from sellers and, at the end of the process, gives the securities to the buyer and the cash to the seller.
  • The timing of payment will depend on the settlement time of the transaction. The buyer must make payment within the settlement period, while the seller must deliver the purchased security within this period.

Core Functions Involved in Settlement Process

  • Trade recording:  Key details about the trades
  • Trade Confirmation: Counterparties agree upon the terms of trade
  • Determination of Obligation: determine what they owe/dues
  • Pay-in of Funds and Securities: Funds/securities are brought in to NSCCL/CH
  • Pay-out of funds and Securities: Release of pay-out out of funds/securities
  • Risk Management: For an efficient settlement system.

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