NSE Clearing carries out clearing and settlement functions as per the settlement cycles provided in the settlement schedule.
The clearing function of the clearing corporation is designed to work out a) what members are due to deliver and b) what members are due to receive on the settlement date. Settlement is a two way process which involves transfer of funds and securities on the settlement date.
NSE Clearing has also devised mechanism to handle various exceptional situations like security shortages, bad delivery, company objections, auction settlement etc.
Clearing is the process of determination of obligations, after which the obligations are discharged by settlement.
NSE Clearing has two categories of clearing members: trading clearing members and custodians. Trading members can trade on a proprietary basis or trade for their clients. All proprietary trades become the member’s obligation for settlement. Where trading members trade on behalf of their clients they could trade for normal clients or for clients who would be settling through their custodians. Trades which are for settlement by Custodians are indicated with a Custodian Participant (CP) code and the same is subject to confirmation by the respective Custodian. The custodian is required to confirm settlement of these trades on T + 1 day by the cut-off time 1.00 p.m. Non-confirmation by custodian devolves the trade obligation on the member who had input the trade for the respective client.
A multilateral netting procedure is adopted to determine the net settlement obligations (delivery/receipt positions) of the clearing members. Accordingly, a clearing member would have either pay-in or pay-out obligations for funds and securities separately. In the case of securities in the Trade for Trade – Surveillance segment and auction trades, obligations are determined on a gross basis i.e. every trade results into a deliverable and receivable obligation of funds and securities. Members pay-in and pay-out obligations for funds and securities are determined by 2.30 p.m. on T + 1 day and are downloaded to them so that they can settle their obligations on the settlement day (T+2).
Auto Delivery Out facility
For pay-in through NSDL / CDSL a facility has been provided to members wherein delivery-out instructions will be generated automatically by the Clearing Corporation based on the net delivery obligations of its Clearing Members. These instructions will be released on the T+1 day to NSDL / CDSL and the securities in the Clearing Members’ pool accounts will be marked for pay-in. Clearing members desirous of availing this facility shall send a letter in the format provided in the Annexure.
Cleared and non-cleared deals
NSE Clearing carries out the clearing and settlement of trades executed on the exchange except Trade for trade – physical segment of capital market. Primary responsibility of settling these deals rests directly with the members and the Exchange only monitors the settlement. The parties are required to report settlement of these deals to the Exchange.
Trading and Settlement Procedure
1) Selecting a Broker or Sub-broker
When a person wishes to trade in the stock market, it cannot do so in his/her individual capacity. The transactions can only occur through a broker or a sub-broker. So according to one’s requirement, a broker must be appointed.
Now such a broker can be an individual or a partnership or a company or a financial institution (like banks). They must be registered under SEBI. Once such a broker is appointed you can buy/sell shares on the stock exchange.
2) Opening a Demat Account
Since the reforms, all securities are now in electronic format. There are no issues of physical shares/securities anymore. So an investor must open a dematerialized account, i.e. a demat account to hold and trade in such electronic securities.
So you or your broker will open a demat account with the depository participant. Currently, in India, there are two depository participants, namely Central Depository Services Ltd. (CDSL) and National Depository Services Ltd. (NDSL).
3) Placing Orders
And then the investor will actually place an order to buy or sell shares. The order will be placed with his broker, or the individual can transact online if the broker provides such services. One thing of essential importance is that the order /instructions should be very clear. Example: Buy a 100 shares of XYZ Co. for a price of Rs. 140/- or less.
Then the broker will act according to your transactions and place an order for the shares at the price mentioned or an even better price if available. The broker will issue an order confirmation slip to the investor.
4) Execution of the Order
Once the broker receives the order from the investor, he executes it. Within 24 hours of this, the broker must issue a Contract Note. This document contains all the information about the transactions, like the number of shares transacted, the price, date and time of the transaction, brokerage amount etc.
Contract Note is an important document. In case of a legal dispute, it is evidence of the transaction. It also contains the Unique Order Code assigned to it by the stock exchange.
Here the actual securities are transferred from the buyer to the seller. And the funds will also be transferred. Here too the broker will deal with the transfer. There are two types of settlements,
- On the Spot settlement: Here we exchange the funds immediately and the settlement follows the T+2 pattern. So a transaction occurring on Monday will be settled by Wednesday (by the second working day)
- Forward Settlement: Simply means both parties have decided the settlement will take place on some future date. Can be T+% or T+9 etc.