5.7 Settlement agencies
WHAT ARE SETTLEMENT AGENCIES?
A clearing corporation, with the help of clearing members, custodians, clearing banks and depositories, settles the trades executed on exchanges. It performs the following tasks:
- Clears all trades.
- Determines obligations of members.
- Arranges for pay-in of funds and securities.
- Arranges for pay-out of funds and securities.
- Assumes the counter-party risk of each member and guarantees financial settlement.
- It also undertakes settlement of transactions on other stock exchanges like the Over the Counter Exchange of India.
In India, the clearing corporation for the NSE is the NSCCL and for the BSE it is BOI Share Holding. The NSCCL, a wholly-owned subsidiary of the NSE, was incorporated in August 1995. It is responsible for the post-trade activities of the NSE. The clearing and settlement operations of the BSE are managed by a company called BOI Share Holding, which is a subsidiary of the Bank of India and the BSE and is known as a clearing house. All settlements for securities are through the clearing house on a delivery versus payment (DVP) basis.
Clearing members (CMs) are the members of the clearing houses/clearing corporations who facilitate settlement of trades done on the stock exchanges. He/she could be a broker or a custodian registered with the SEBI since he/she is an important intermediary in the capital market and an essential link in the depository system. The CM’s main activity is to facilitate pay-in/pay-out of securities to/from stock exchanges/clearing house/clearing corporations either on their own behalf or on behalf of their clients. The securities which are due for delivery can be delivered directly from the client's account (depending on whether the exchange provides this facility) or through CMs to the stock exchanges/clearing house/clearing corporation account.
Similarly, pay-out of securities can be delivered directly to the client’s account on the basis of information given to a clearing house by the CM or to the CM’s account. In the capital market segment all the trading members of the exchange are the clearing members of the clearing corporation. However, please note that in the case of trades done in the future and option market, clearing members can be a separate entity as compared to trading members as the volume of trades done in this segment is huge.
A custodian is a clearing member but not a trading member. He/she settles trades assigned to him/her by the trading members. He/she is required to confirm whether he/she is going to settle a particular trade or not. If it is confirmed, the NSCCL assigns that obligation to that custodian and the custodian is required to settle it on the settlement day. If the custodian rejects the trade, the obligation is assigned back to the trading/clearing member.
Clearing banks act as a link between the clearing members and the NSCCL for the settlement of funds, i.e. pay-in and pay-out of funds. Every clearing member gets an account opened with a clearing bank for this purpose only. A clearing bank works on the instructions of the clearing member. A clearing member after defining the obligations in terms of funds informs the clearing bank about the obligations to be fulfilled. The clearing bank makes available the funds required on the pay-out day to meet the obligations on time.