In the secondary market or stock exchange, each trade involves two participants. One party acts as the buyer, acquiring the securities, while the other assumes the role of the seller, divesting the securities. This interaction constitutes a primary stock exchange trade. Following this initial trade, the process advances to the stages of clearing and settlement.
During clearing, specialized institutions known as clearing houses work to reconcile the shares to be transferred between buyers and sellers. The objective is to ensure a seamless clearing process, culminating in the determination of the precise number of shares bought and sold, along with the final monetary obligations.
The settlement phase is executed upon successful clearing through collaboration among banks, clearing members, and depository institutions. This phase concludes the transaction process, confirming the accurate transfer of ownership and funds between the involved parties.
The concluding phase of the transaction involves a bilateral procedure known as trade settlement. This process is deemed complete when the buyer obtains the securities, and the seller receives payment for said securities. While the formal transaction unfolds on the transaction day, the ultimate transfer of ownership culminates on the settlement date.
Furthermore, the transaction date remains constant and is represented by the letter 'T.' The settlement date is determined by adding a specific number of days to 'T,' reflecting the duration required for the settlement to finalize.
Spot Settlement: This represents the prevalent approach to settlement. Transactions are promptly resolved within the subsequent two days, utilizing a rolling settlement mechanism.
Forward Trade Settlement: This comes into play when trading parties concur to accept the delivery at a forthcoming date. This upcoming date might be T+5 or T+7 days. Trade Day, commonly referred to as T-Day, signifies the day on which you purchase a stock.
1. Clearing Corporation
An essential participant within the stock market's clearance and settlement procedure is the clearance entity. The National Securities Clearance Entity Ltd. is responsible for clearing and finalizing transactions conducted within the stock exchange (NSCCL). Moreover, it assumes the role of risk oversight and bears the entirety of settlement expenses in case of a member's non-compliance.
2. Clearing Member
Clearing Corporation plays a crucial role in the clearing and settlement process within the Indian stock exchange. It facilitates the transfer of transactions initiated by trading members from the stock exchange to NSCCL, which subsequently forwards them to the clearing members. The clearing member selects the optimal share position that aligns with the executed trade.
3. Clearing Banks
The duty of settling funds rests with the clearing banks. Every clearing member is required to establish a clearing account with one of the 13 designated clearing banks. In case of a pay-out, clearing members receive funds in their clearing accounts, and in the event of a pay-in, they are obligated to ensure the availability of funds.
4. Professional Clearing Members
These individuals or experts belong to the specialized group within NSCCL. However, their role is limited to clearing and settling trades on behalf of their clients, as they are not permitted to engage in trading themselves. Typically, the category of professional clearing members encompasses banks, custodians, and other similar entities.
Settlement for all types of securities within the equity sector and fixed income instruments listed on the BSE must be finalized within two business days (T+2). The BSE provides a settlement calendar indicating the scheduled dates for various settlement processes. These dates are prepared by the BSE in advance and distributed to market participants. In the context of Rolling Settlements, both funds and securities are processed for pay-in and pay-out on the same day.
Security and Funds (Pay in and Payout)
Bad delivery reporting
|Security and Funds (Pay in and Payout)||T+2|
|Bad delivery reporting||T+4|
When an investor's account lacks sufficient settled funds upon completing a trade, it results in a settlement violation. The brokerage business finalizes the contract if the investor does not furnish the required amounts by the settlement date. The brokerage house might liquidate the investor's assets to offset losses stemming from a decrease in security value. Additionally, the brokerage may impose a penalty in the form of a specific interest rate or fee.
The stock exchange regularly handles a substantial trading volume. To ensure smooth trade execution for each transaction, participants follow these processes. Before trading, investors must understand these processes to make well-informed decisions.
In most stock trades, the settlement takes place two business days after executing the order, known as T+2 (trade date plus two days). For instance, if you execute an order on Monday, it would usually settle on Wednesday.
In a secondary market, trading and settling shares starts by selecting a broker or sub-broker and concludes with the settlement of shares. To engage in secondary market trading, you need to initiate the opening of a Demat account with a broker or bank. Once your account becomes operational, you can buy and sell securities.
A trade is immediately followed by clearing and settlement. Clearing involves double-checking all the terms of the deal right after the trade. The settlement represents the final stage, during which the transfer of securities and money occurs.
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