The transactions in secondary market pass through three distinct phases, viz., trading, clearing and settlement. While the stock exchanges provide the platform for trading, the clearing corporation determines the funds and securities obligations of the trading members and ensures that the trade is settled through exchange of obligations. The clearing banks and the depositories provide the necessary interface between the custodians/clearing members for settlement of funds and securities obligations of trading members.
Several entities, like the clearing corporation, clearing members, custodians, clearing banks, depositories are involved in the process of clearing. The role of each of these entities is explained below:
• Clearing Corporation: The clearing corporation is responsible for post-trade activities such as the risk management and the clearing and settlement of trades executed on a stock exchange.
• Clearing Members: Clearing Members are responsible for settling their obligations as determined by the NSCCL. They do so by making available funds and/or securities in the designated accounts with clearing bank/depositories on the date of settlement.
• Custodians: Custodians are clearing members but not trading members. They settle trades on behalf of trading members, when a particular trade is assigned to them for settlement. The custodian is required to confirm whether he is going to settle that trade or not. If he confirms to settle that trade, then clearing corporation assigns that particular obligation to him. As on date, there are 11 custodians empanelled with NSCCL. They are Citibank N.A., Deutsche Bank A.G., HDFC Bank Limited, HSBC Limited, ICICI Limited, IL&FS Limited, Standard Chartered Bank, State Bank of India, SHCIL, Kotak Mahendra Bank Ltd., DBS Bank Ltd and Axis Bank.
• Clearing Banks: Clearing banks are a key link between the clearing members and Clearing Corporation to effect settlement of funds. Every clearing member is required to open a dedicated clearing account with one of the designated clearing banks. Based on the clearing member’s obligation as determined through clearing, the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out. There are 13 clearing banks of NSE, viz., Axis Bank Ltd., Bank of India Ltd., Canara Bank Ltd., Citibank N.A, HSBC Ltd., HDFC Bank Ltd., ICICI Bank Ltd., IDBI Bank Ltd., Indusind Bank Ltd., Kotak Mahindra Bank, Standard Chartered Bank, State Bank of India and Union Bank of India
• Depositories: Depository holds securities in dematerialized form for the investors in their beneficiary accounts. Each clearing member is required to maintain a clearing pool account with the depositories. He is required to make available the required securities in the designated account on settlement day. The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL and visa-versa as per the schedule of allocation of securities.
• Professional Clearing Member: NSCCL admits special category of members known as professional clearing members (PCMs). PCMs may clear and settle trades executed for their clients (individuals, institutions etc.). In such cases, the functions and responsibilities of the PCM are similar to that of the custodians. PCMs also undertake clearing and settlement responsibilities of the trading members. The PCM in this case has no trading rights, but has clearing rights i.e. he clears the trades of his associate trading members and institutional clients.
