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.
What is Trade Settlement?
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.
Types of Trade Settlement in Stock Market
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.
Participants Involved in the Trade Settlement Process
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.
Trade Settlement Process in Stock Market
- On the T day post-trade execution, the stock exchange informs the clearing corporation about transaction details
- Clearing corporation confirms trade with clearing members before trade closure, determining obligations
- Verification requires sufficient funds in clearing institutions and share release from depositories
- Clearing corporations receive funds and securities for buy and sale transactions from clearing banks and depositories
- Clearing member gets securities; Sale transaction: Clearing member receives funds in the clearing account
BSE Trade Settlement
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.
NSE Trade Settlement
Custodial confirmation
T+1
Auction settlement
T+3
Bad delivery reporting
T+4
| Activity | Day |
|---|---|
Delivery generation | T+1 |
Custodial confirmation | T+1 |
Security and Funds (Pay in and Payout) | T+2 |
Auction settlement | T+3 |
Bad delivery reporting | T+4 |
Trade Settlement Violation
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.
To Sum Up
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.
