Trading and Clearing/Self Clearing Members

Five important entities in the trading system

• Trading Members: are members of Stock Exchanges (SEBI registered) who are authorized to trade either on behalf of their clients or on their own account (proprietary trades). As per SEBI regulations, every trading member has a unique TM-ID.
• Trading cum Clearing Members (TCM): is a Clearing Member (CM) who is also a Trading Member (TM) of the exchange. Most large brokers are TCMs. Such TCMs can clear and settle their own proprietary trades, their client trades as well as trades of other TMs and even Custodial Participants.
• Professional Clearing Member (PCM): Professional clearing member clears the trades of associate Trading Member and institutional clients. PCM is not a Trading Member of the exchange and hence is not authorized to execute trades; they can only clear. Typically banks or FPI custodians become PCM to clear their client trades
• Self-Clearing Member (SCM): A Self Clearing Member is also a Trading Member on the exchange. Such SCMs can clear and settle their own proprietary trades and their client trades but cannot clear and settle trades of other TMs (unlike TCMs)
• Participants: Participant is a client of a trading member. Clients may trade through various trading members but settle through a single clearing member. Interoperability allows seamless transfer of margins and positions across clearing members.

Clearing Members

Broadly speaking there are three types of clearing members

• Self-clearing member: They clear and settle trades executed by them only, either on their own account or on account of their.
• Trading member–cum–clearing member: They clear and settle their own trades as well as trades of other trading.
• Professional clearing member: They clear and settle trades executed by trading members.

Clearing Banks

Funds settlement takes place through clearing banks. For the purpose of settlement all clearing members are required to open a separate bank account with Clearing Corporation designated clearing bank for F&O segment.

Clearing Member Eligibility Norms

Net worth of at least Rs.300 lakhs. The net worth requirement for a Clearing Member who clears and settles only deals executed by him is Rs. 100 lakhs. Deposit of Rs. 50 lakhs to clearing corporation which forms part of the security deposit of the Clearing Member. Additional incremental deposits of Rs.10 lakhs to clearing corporation for each additional TM, in case the Clearing Member undertakes to clear and settle deals for other TMs.

Depository

While traditionally shares were held in a physical certificate format, today it is mandatory to hold them in the electronic or dematerialized form. Hence, a Demat account is mandatory for share transactions. SEBI has created a structure to ensure optimum performance and maximum control over Demat accounts by creating Depositories entities that hold your Demat accounts.

All participants including investors, brokers, and clearing members need to have a Demat account to trade in the stock exchange.

Clearing Corporation

This is an entity associated with a stock exchange that handles the confirmation, settlement, and delivery of shares. It acts as a buyer for the seller and a seller for the buyer. In simpler terms, it facilitates purchase on one end of the transaction and sale on the other. It ensures that the settlement cycles are short and consistent while keeping the transaction risks in check and providing a counter-party risk guarantee.

Order types, order conditions and order matching rules

There are different types of orders that any client can place on the F&O trading system. Broadly, orders can be classified into two condition-based order sets viz. Orders based on Time condition and Orders based on Price condition.

Clearing and Settlement Process When You Sell a Share

Using the example cited above, sale of shares process is as follows:

• You sell shares Day 01 or T Day. The shares are blocked in your Demat account immediately. Hence, you cannot sell the same shares on the same day.
• On Day 02 (T+1 Day), the broker gives the shares to the exchange.
• On Day 03 (T+2 Day), you receive funds in your banking account post deduction of all charges.

Orders based on Time condition

• Day order: is an order which is valid for a single day i.e. the day on which it is entered. Day orders not executed during the day are automatically cancelled by the system at the end of the day.
• Immediate or cancel (IOC) order: has to be executed as soon as the order is released into the trading system. Any unmatched order will be immediately cancelled. At times part of the order is matched and the unmatched portion of the order is cancelled.

Orders based on Price condition

• Limit order: Is an order to buy or sell a contract at a specified price. The user specifies the limit price while placing the order and the system executes the order at or at better price than the limit price (lower for buy order and higher for sell order). Limit order is a good option when executing orders in a volatile market.
• Market order: Is an order to buy or sell at the best available price in the market. Unlike the limit order, the market order gets executed at the best possible in the market subject to availability of volumes. Markets orders work well in trending markets.
• Stop-loss order: Is an order to buy (or sell) a security once the price of the security moves above (or drops below) a trigger price. The stop-loss order gets activated only when the trigger price is reached / crossed. Stop loss orders are an important means of risk management for short-term traders.