by The transactions in secondary market are processed through three distinct phases, viz. trading, clearing and settlement. While the stock exchange provides the platform for trading to its trading members, the clearing corporation determines the funds and securities obligations of the trading members and ensures that trading members meet their obligations.
The clearing banks and depositories provide the necessary interface between the custodians/clearing members (who clear for the trading members or their own transactions) for settlement of funds and securities obligations of trading members.
Stock Exchange
The clearing process involves determination of what counter-parties owe, and what counter-parties are due to receive on the settlement date. It is essentially the process of determination of obligations, after which the obligations are discharged by settlement. To illustrate, the clearing and settlement process for transactions in securities on NSE is presented.
Several entities, like clearing corporation, clearing members, custodians, clearing banks, depositories, are involved in the process of clearing. The roles of each of these entities are explained below:
i) Clearing Corporation:
The clearing corporation is responsible for post-trade activities of a stock exchange. Clearing and settlement of trades and risk management are the central functions for a clearing corporation.
ii) Clearing Members:
Clearing members can be of two types: (i) those who are trading as well as clearing members; these members trade as well as take the responsibility to settle their trades, and (ii) those who act only as clearing members; these members do not trade but take on the responsibility to settle the trades of other trading members. They are responsible for settling their obligations as determined by the clearing corporation. They have to make available funds and/or securities in the clearing account or pool account, as the case may be, to meet their obligations on the settlement day.
iii) Custodians:
Custodians are clearing members but not trading members. They settle trades on behalf of other trading members. A trading member may assign a particular trade to a custodian for settlement. The custodian is required to confirm whether he is going to settle that trade or not. If it confirms to settle that trade, then clearing corporation assigns that particular obligation to that custodian and the custodian is required to settle it on the settlement day.
iv) Clearing Banks:
Clearing banks are a key link between the clearing members and clearing corporation for funds settlement. Every clearing member is required to open a dedicated clearing account with one of the 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.
v) Depositories:
Depository helps in the settlement of the dematerialised securities. It holds dematerialised securities of the investors in the beneficiary accounts. Each clearing member is required to maintain a clearing pool account with all the depositories. Separate accounts are required to be opened for the settlement of trades on different stock exchanges.
The clearing members are required to provide the securities as per their obligations in the clearing pool account on settlement day. At a pre-determined time, the depository sends the information about the availability of securities in the clearing pool accounts of the clearing member to the clearing corporation.
