Clearing And Settlement

Clearing and settlement are the back-end processes that facilitate the smooth functioning of the Indian stock market. These processes are critical to ensure the timely and accurate transfer of securities and funds between buyers and sellers.

Clearing Process:

The clearing process starts after the trading session is over. The clearing corporation, which is a subsidiary of the stock exchange, acts as an intermediary between the buyer and seller to ensure the settlement of trades.

The clearing process involves the following steps:

Trade Verification: The first step in the clearing process is to verify the trades executed on the stock exchange. The clearing corporation matches the trade details from the stock exchange with the details submitted by the trading members.

Margin Calculation: The clearing corporation calculates the margin requirement for each trading member based on their open positions and the volatility of the stocks.

Margin Collection: The clearing corporation collects the margins from the trading members.

Settlement Guarantee Fund: The clearing corporation maintains a settlement guarantee fund to ensure the settlement of trades in case a trading member defaults.

Trade Netting: The clearing corporation nets the trades executed by each trading member to minimize the number of securities and funds that need to be transferred.

Settlement Process:

The settlement process involves the transfer of securities and funds between the buyer and seller. The settlement of trades happens on the second day after the trade date (T+2).

The settlement process involves the following steps:

Pay-in: On the settlement day, the trading members transfer the securities to the clearing corporation's account and the funds to the clearing bank's account.

Pay-out: The clearing corporation transfers the securities to the buyers' account and the funds to the sellers' account.

Auction: In case a trading member fails to deliver the securities or funds, the clearing corporation conducts an auction to fulfill the delivery obligations.

Benefits of Clearing and Settlement:

Risk Reduction: The clearing and settlement process reduces the counterparty risk by ensuring the timely and accurate transfer of securities and funds.

Transparency: The clearing and settlement process provides transparency in the trading process by verifying the trades executed on the stock exchange.

Confidence: The clearing and settlement process builds confidence in the stock market by ensuring the timely settlement of trades.

Efficiency: The clearing and settlement process increases the efficiency of the stock market by minimizing the number of securities and funds that need to be transferred.

Conclusion:

Clearing and settlement are critical back-end processes that facilitate the smooth functioning of the Indian stock market. These processes ensure the timely and accurate transfer of securities and funds between buyers and sellers, reduce counterparty risk, provide transparency, build confidence, and increase efficiency. It is essential for investors and traders to understand the clearing and settlement process to make informed investment decisions in the stock market.