Settlement Agencies

Several entities are involved in the process of clearing. These are clearing corporation,  clearing members, custodians, Clearing banks, Depositories etc. Lets study the roles of each of these entities.

Clearing Corporation

  • The clearing corporation is responsible for post-trade activities such as risk management and clearing and settlement of trades executed on a stock exchange.
  • The National Securities Clearing Corporation Ltd (NSCCL) while Clearing House of BSE called Bank of India Shareholding Ltd (BOISL) handles the clearing and settlement operations on behalf of respective exchanges.
  • Clearing Corporations clear all trades, determine obligations of members, arranges for pay-in of funds/securities, receives funds/securities, processes for shortages in funds/securities, arranges for pay-out of funds/securities, guarantees settlement, and collects and maintains margins/collateral/base capital/other funds.

Clearing Member

  • Clearing members are responsible for settling their obligations as determined by the clearing corporation.
  • They have to make available funds/or securities in the designated accounts with clearing bank/depositories, as the case may be, to meet the obligations on the settlement day.
  • In the capital market segment, all trading members of the Exchange are required to become the Clearing Member of the Clearing Corporation.

Custodians

  • Custodians are clearing members but not trading members. 
  • They settle trades on behalf of trading members when a particular trade is assigned to them for settlement.
  • The custodian is required to confirm whether he is going to settle the trade or not.
  • If he confirms to settle the trade, then clearing corporation assigns that particular obligation to him.
  • If he rejects the trade, the obligation is assigned back to the trading/clearing member.
  • Custodians empanelled by NSCCL are: Deutshe Bank A.G. ,HDFC Bank Ltd ,HSBC Ltd ,ICICI Bank Ltd ,Standard Chartered bank Ltd ,Axis bank Ltd ,Stock Holding Corporation of India Ltd ,DBS Bank Ltd ,J P Morgan Chase Bank ,Kotak Mahindra Bank Ltd ,SBI,Citibank N.A.,Obris Financial Corporation Ltd. ,IL&FS Ltd

Clearing Banks

  • Clearing Banks are a key link between the Clearing Member and Clearing Corporation to effect settlement of funds.
  • Every clearing member is required to open a dedicated clearing account with one of the designated clearing banks.
  • Based on the clearing member’s obligations as determined through clearing, the clearing member makes funds available in the Clearing account for the pay-in and receives funds in case of pay-out.
  • Designated Clearing Banks: Axis Bank Ltd ,Bank of India Ltd ,Canara Bank Ltd ,Citibank N.A. ,HSBC Ltd ,HDFC Bank Ltd,ICICI Bank Ltd, IDBI Bank Ltd,Indusind Bank Ltd ,Kotak Mahindra Bank ,Standard Chartered Bank, State Bank of India Union Bank of India

Depositories

  • Depositories hold securities in dematerialized form for the investors in their beneficiary accounts. NSDL & CDSL are the two depositories of India
  • Each clearing member is required to maintain a clearing pool account with the depositories.
  • He is required to make available the required securities in the designated account on settlement day.
  • The depository runs an electronic file of transfer of securities from accounts of custodians/clearing member of NSCCL and visaversa as per the schedule of allocation of Securities.

Professional Clearing Member

  • NSCCL admits a special category of members known as professional clearing members (PCMs).
  • PCMs may clear and settle trades executed for their clients (individuals, institutions etc.)
  • In such cases, the functions and responsibilities of the PCM are similar to that of custodians.
  • PCMs also undertake clearing and settlement responsibilities of the trading members.
  • The PCM in this case has no trading rights, but has clearing rights i.e. he clears the trades of his associate trading members and institutional clients
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