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Clearing & ASettlement

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NSE Trading System - Clearing & Settlement

Clearing & Settlement (Equities)

Clearing is the process of determination of obligations, after which the obligations are discharged by settlement. NSCCL carries out clearing and settlement functions as per the settlement cycles of different sub-segments in the Equities segment. The clearing function of the clearing corporation is designed to work out

  1. what counter parties owe and

  2. what counter parties are due to receive on the settlement date.

Settlement is a two way process which involves legal transfer of title to funds and securities or other assets on the settlement date. NSCCL has also devised mechanism to handle various exceptional situations like security shortages, bad delivery, company objections, auction settlement etc.

NSCCL has two categories of clearing members: trading members and custodians. The trading members can pass on its obligation to the custodians if the custodian confirms the same to NSCCL. All the trades whose obligation the trading member proposes to pass on to the custodian are forwarded to the custodian by NSCCL for their confirmation. The custodian is required to confirm these trade on T + 1 days basis.

Once, the above activities are completed, NSCCL starts its function of Clearing. It uses the concept of multi-lateral netting for determining the obligations of counter parties. Accordingly, a clearing member would have either pay-in or pay-out obligations for funds and securities separately. Thus, members pay-in and pay-out obligations for funds and securities are determined latest by T + 1 day and are forwarded to them so that they can settle their obligations on the settlement day (T+2).

Cleared and non-cleared deals

NSCCL carries out the clearing and settlement of trades executed in the following sub-segments of the Equities segment:

  1. All trades executed in the Book entry / Rolling segment.

  2. All trades executed in the Limited Physical Market segment.

NSCCL does not undertake clearing and settlement of deals executed in the Trade for Trade sub-segment of the Equities (Capital Market) segment of the Exchange. 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.

Clearing Mechanism

Trades in rolling segment are cleared and settled on a netted basis. Trading and settlement periods are specified by the Exchange / Clearing Corporation from time to time. Deals executed during a particular trading period are netted at the end of that trading period and settlement obligations for that settlement period are computed. A multilateral netting procedure is adopted to determine the net settlement obligations.

In a rolling settlement, each trading day is considered as a trading period and trades executed during the day are netted to obtain the net obligations for the day. Trade-for-trade deals and Limited Physical Market deals are settled on a trade for trade basis and settlement obligations arise out of every deal.

Settlement Cycle

At the end of each trading day, concluded or locked-in trades are received from NSE by NSCCL. NSCCL determines the cumulative obligations of each member and electronically transfers the data to Clearing Members (CMs). All trades concluded during a particular trading period are settled together. A multilateral netting procedure is adopted to determine the net settlement obligations (delivery/receipt positions) of CMs. NSCCL then allocates or assigns delivery of securities inter se the members to arrive at the delivery and receipt obligation of funds and securities by each member. Settlement is deemed to be complete upon declaration and release of pay-out of funds and securities.

On the securities pay-in day, delivering members are required to bring in securities to NSCCL. On pay out day the securities are delivered to the respective receiving members. Exceptions may arise because of short delivery of securities by CMs, bad deliveries or company objections on the pay-out day.

Auctions

Each CM would communicate to NSCCL on the pay-in day the securities that the CM would be delivering and those that the CM is unable to deliver. NSCCL identifies short deliveries and conducts a buying-in auction on the day after the pay-out day through the NSE trading system.

The CM is debited by an amount equivalent to the securities not delivered and valued at a valuation price (the closing price as announced by NSE on the day previous to the day of the valuation). If the buy-in auction price is more than the valuation price, the CM is required to make good the difference. All shortages not bought-in are deemed closed out at the highest price between the first day of the trading period till the day of squaring off or closing price on the auction day plus 20%, whichever is higher. This amount is credited to the receiving member's account on the auction pay-out day.

Bad Deliveries (in case of physical settlement)

Bad deliveries (deliveries which are prima facie defective) are required to be reported to the clearing house within two days from the receipt of documents. The delivering member is required to rectify these within two days. Un-rectified bad deliveries are assigned to auction on the next day.

Company Objections (in case of physical settlement)

Company objections arise when, on lodgment of the securities with the company / Share Transfer Agent (STA) for transfer, which are returned due to signature mismatch or for any other reason for which the transfer of security cannot be effected. The original selling CM is normally responsible for rectifying / replacing defective documents to the receiving CM as per pre-notified schedule. The CM on whom company objection is lodged has an opportunity to withdraw the objection if the objection is not valid or the documents are incomplete (i.e. not as required under guideline No.100 or 109 of SEBI Good/Bad delivery guidelines), within 7 days of lodgement against him. If the CM is unable to rectify/replace defective documents on or before 21 days, NSCCL conducts a buying-in auction for the non-rectified part of defective document on the next auction day through the trading system of NSE. All objections, which are not bought-in, are deemed closed out on the auction day at the closing price on the auction day plus 20%. This amount is credited to the receiving member's account on the auction pay-out day.


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[ last updated on 15.10.2004 ]<>[ chkd-apvd-ef ]