MBA 3rd semester FM01 Notes

1. CLEARING AND SETTLEMEMT

2. Introduction
• The transactions in secondary market pass through
three distinct phases, viz., trading, clearing and
settlement.
• While the stock exchanges provide the platform for
trading, the clearing corporation determines the
funds and securities obligations of the trading
members and ensures that the trade is settled
through exchange of obligations.

3. CLEARING AND SETTLEMEMT
• The clearing banks and the depositories
provide the necessary interface between the
custodians/clearing members for settlement
of funds and securities obligations of trading
members.

4. Clearing Corporation
• The first clearing corporation to be established in the
country and also the first clearing corporation in the
country to introduce settlement guarantee is the
National Securities Clearing Corporation Ltd. (NSCCL),
a wholly owned subsidiary of NSE.

5. Clearing Corporation
• NSCCL was incorporated in August 1995. It
was set up with the objectives of bringing and
sustaining confidence in clearing and
settlement of securities; promoting and
maintaining short and consistent settlement
cycles; providing counter-party risk guarantee,
and operating a tight risk containment system.

6. 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 that trade or not. If he confirms to
settle that trade, then clearing corporation assigns
that particular obligation to him.

7. Custodians
• As on date, there are 13 custodians empanelled
with NSCCL. They are Deutsche Bank A.G., HDFC
Bank Ltd., Hongkong Shanghai Banking
Corporation Ltd., Infrastructure leasing and
Financial Services Ltd., ICICI Bank Ltd., Standard
Chartered Bank Ltd., Stock Holding Corporation of
India Ltd. , Axis Bank Ltd., DBS bank Ltd., JP
Morgan Chase Bank N.A., Kotak Mahindra Bank
Ltd. State Bank of India and Citibank N.A and
Orbis Financial Corporation Ltd.

8. Clearing Banks
• Clearing banks are a key link between the
clearing members 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 obligation as determined through
clearing, the clearing member makes funds
available in the clearing account for the pay-in
and receives funds in case of a pay-out

9. Clearing Banks
• There are 13 clearing banks of NSE, viz., 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 and Union Bank of
India

10. Depositories
• Depository holds securities in dematerialized
form for the investors in their beneficiary
accounts. 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

11. Depositories
• The depository runs an electronic file to transfer
the securities from accounts of the
custodians/clearing member to that of NSCCL and
visa-versa as per the schedule of allocation of
securities. The two depositories in India are the
National Securities Depository Ltd (NSDL) and
Central Depository Services (India) Ltd (CDSL).

12. Clearing & Settlement Process
• The clearing process involves determination
of what counter-parties owe, and which
counter-parties are due to receive on the
settlement date, thereafter the obligations are
discharged by settlement. The clearing and
settlement process comprises of three main
activities- clearing, settlement and risk
management.

13. The core processes involved in
clearing and settlement include
• Trade Recording
• Trade Confirmation
• Determination of Obligation
• Pay-in of Funds and Securities
• Pay-out of Funds and Securities

14. Settlement Cycle
• NSCCL clears and settles trades as per the well-
defined settlement cycles. All the securities are
being traded and settled under T+2 rolling
settlement. The NSCCL notifies the relevant trade
details to clearing members/custodians on the
trade day (T), which are affirmed on T+1 to
NSCCL. Based on it, NSCCL nets the positions of
counterparties to determine their obligations. A
clearing member has to pay-in/pay-out funds
and/or securities.