Clearing and Settlement
The clearing and settlement mechanism in Indian securities market has witnessed several innovations. These include use of the state-of-art information technology, compression of settlement cycle, dematerialization and electronic transfer of securities, securities lending and borrowing, professionalization of trading members, fine-tuned risk management system, emergence of clearing corporations to assume counterparty risk etc.
- Primarily, the Clearing Member (CM) performs the followingfunctions:
- Clearing: Computing obligations of all his TM’s i.e. determining positions tosettle.
- Settlement: Performing actual settlement. Currently, all the Futures and Optionscontracts are cash settled.
- Risk Management: Setting position limits based on upfront deposits/margins foreach TM and monitoring positions on a continuous basis.
The stock exchanges in India were following a system of account period settlement for cash market transactions and then the T+2 rolling settlement was introduced for all securities. The members receive the funds/securities in accordance with the pay-in/pay-out schedules notified by the respective exchanges.
Given the growing volume of trades and market volatility, the time gap between trading and settlement gives rise to settlement risk. In recognition of this, the exchanges and their clearing corporations employ risk management practices to ensure timely settlement of trades.
The order is converted to a trade as soon as it finds a matching sell/buy order. The trades are cleared to determine the obligations of counterparties to deliver securities/funds as perSettlement schedule. Buyer/seller delivers funds/securities and receives securities/ funds and acquires ownership over them.