The mechanism through which all parties to a transaction get their receivables i.e. either funds or shares is known as ‘clearing and settlement’ or simply ‘settlement’.
On each of the exchanges, thousands of orders get matched with each other during the course of a trading cycle. Even though for each trade there is a buyer broker and a seller broker, they never interact with each other for the settlement of that trade. Their interaction is only with the settlement agency of their exchange.
When an investor enters into a transaction with a broker, either the shares or funds have to be delivered to the broker. In turn, the broker delivers these to the settlement agent on ‘pay-in day’ (explained in the next section). Having made sure that it has received shares and funds from all brokers, it processes the deliveries and earmarks the shares for delivery to the buyer broker. So on the pay-out day (explained in the next section) it is able to deliver shares to the respective buyer broker and funds to the respective seller broker.
For trades on BSE, the settlement agent is called as ‘Clearing House (CH)’ while on NSE it is ‘National Securities Clearing Corporation Ltd. (NSCCL)’
Clearing House – Settlement Agent of the BSE
The clearing and settlement operations of the BSE is managed by a company called BOI Share Holding, which is a subsidiary of Bank of India and BSE and is known as ClearingHouse. All settlements for securities are through the ClearingHouse on a delivery versus payment (DVP) basis.
National Securities Clearing Corporation – Settlement Agent of NSE
The clearing and settlement operations of the NSE are managed by its wholly owned subsidiary, the National Securities Clearing Corporation Limited, also known as Clearing Corporation.
Common settlement processes on both exchanges
|The broker directly carries out settlements of physical securities with the ClearingHouse/ Clearing Corporation.|
|CH/NSCCL instructs designated clearing banks to do funds settlement.|
|The CH/NSCCL interfaces with the depository on one hand and the clearing banks on the other to provide DVP settlement for depository enabled trades.|
The settlement cycle on the BSE is Trade plus two days, or T+2, as per a Sebi directive implementing this new cycle from April 1, 2003. Under rolling settlement, trades done on one day are settled after a certain number of days. So, T+2 will mean that the final settlement of transactions done on the Trade day, will be settled by exchange of money and securities on the second business day (excluding Saturday, Sundays, Bank and Exchange Trading Holidays).
Pay-in and Pay-out for 'A', 'B1', 'B2', ‘T’, ‘S’, ‘TS’, 'C', "F", "G" & 'Z' group of securities
Settlement is done on a T+2 basis. The pay-in/pay-out process will be settled on the T+2 day.
Summary of the Settlement Cycle
Source : www.bseindia.com
NSE Settlement Cycle
The NSE too follows a rolling settlement cycle of T+2.
The stock exchange sends to NSCCL the details of trades at the end of the trading day. The clearing corporation determines the total obligations of each member and transfers the data to clearing members (CM). All the trades done during a particular trading session are clubbed together and settled. NSCCL then determines the net obligations of members in terms of deliveries of securities and funds, and the settlement is completed when the funds and securities are paid out.
On the securities pay-in day, members bring in securities to NSCCL whereas on the pay out day, securities are delivered to members. If there is a shortfall in securities, then an auction is conducted to meet it.
This table makes the process clearer :
|Trading||Rolling Settlement Trading||T|
|Clearing||Custodial Confirmation||T+1 working days|
|Delivery Generation||T+1 working day|
|Settlement||Securities and Funds pay in||T+2 working day|
|Securities and Funds pay out||T+2 working day|
|Valuation Debit||T+2 working day|
|Post Settlement||Auction||T+3 working day|
|Bad Delivery Reporting||T+4 working day|
|Auction settlement||T+5 working day|
|Rectified bad delivery pay-in and pay-out||T+6 working day|
|Re-bad delivery reporting and pickup||T+8 working day|
|Close out of re-bad delivery and funds pay-in & pay-out||T+9 working days|
Source : www.nseindia.com