5.6 Trading cycles

TRADING, CLEARING & SETTLEMENT

Once you have bought or sold shares, the transaction is complete only when you have got the shares you purchased, or received money for the shares you sold. This is called settlement in stock market parlance. The stock exchanges have a complex mechanism in place to ensure that every trade is properly matched, and shares are received or delivered properly. There are basically three tasks that are performed in the process of buying and selling of securities. They are:

• Trading
• Clearing
• Settlement

Trading basically deals with placing an order and its execution. Clearing deals with the determination of obligations in terms of funds and securities. Settlement means that the trade will be completed and for trades on the BSE the settlement agent is called as ‘Clearing House (CH)’ while on the NSE it is termed the ‘National Securities Clearing Corporation Ltd (NSCCL)’. In case of a shortfall of securities, an auction is called for to sort out the difference.

The clearing and settlement mechanism in the Indian securities’ market has witnessed several innovations. The stock exchanges in India were earlier following a system of account period settlement for cash market transactions and then the T+2 rolling settlement was introduced for all the securities. The members receive the funds / securities in accordance with the pay-in / pay-out schedules notified by the respective exchanges. The trades are settled irrespective of default by any member and the exchange follows up with the defaulting member subsequently for recovery of his or her dues to the exchange.

Two depositories viz. the National Securities Depositories Ltd (NSDL) and the Central Depositories Services Ltd (CDSL) provide electronic transfer of securities and more than 99 per cent of the turnover is settled in dematerialised form. The members / custodians make available the required securities in their pool accounts with depository participants (DPs) by the prescribed pay-in time for securities. The depository transfers the securities from the pool accounts of members / custodians to the settlement account of the clearing agency.

As per the schedule determined by the clearing agency, the securities are transferred on the pay-out day by the depository from the settlement account of the clearing agency to the pool accounts of members /custodians. The pay-in and pay-out of securities is put into effect on the same day for all settlements. Select banks have been empanelled by the clearing agencies for the electronic transfer of funds. The members are required to maintain accounts with any of these banks.

The members are informed electronically of their pay-in obligations of funds. The members make available the required funds in their accounts with clearing banks by the prescribed pay-in day. The clearing agency forwards the funds’ obligations files to the clearing banks which, in turn, debit the accounts of members and credit the account of the clearing agency. In some cases, the clearing agency runs an electronic file to debit members’ accounts with clearing banks and credit its own account. On payout day, the funds are transferred by the clearing banks from the account of the clearing agency to the accounts of members as per the members’ obligations. In the T+2 rolling settlement the pay-in and pay-out of funds as well as securities take place within two working days after the trade date.