Nism Series 8 l Chapter 7 Part-1 l Introduction to Clearing and Settlement System l Nism Exam

LEARNING OBJECTIVES:
After studying this chapter, you should know about:
• Different types of clearing members
• Interoperability of clearing corporations and its benefits
• Clearing and settlement mechanism for equity derivatives
• Risk management in equity derivatives segment
• Margining system in equity derivatives segment
• Position limits
• Settlement Guarantee Fund and Investor ProtectioN Fund

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Clearing Corporation is responsible for clearing and settlement of all trades executed in
the F&O Segment of the Exchange. According to the legal principle of ‘novation’, the
Clearing Corporation becomes the central counterparty to all trades that take place on
the exchange’s derivatives platform. The Clearing Corporation not only acts as a legal
counterparty to all trades in this segment but also guarantees their financial settlement.
The Clearing and Settlement process comprises of three main activities, viz., Clearing,
Settlement and Risk Management. Clearing and settlement activities in the F&O segment
are undertaken by Clearing Corporation with the help of Clearing Members and Clearing
Banks.

------------------------------------------------------------------------------------------------------------------------- Clearing Members=:
As you may recollect from our discussion in section 6.1, there are broadly three types of
clearing members:
1. Self-clearing member: They clear and settle trades executed by them only, either on
their own account or on account of their clients.
2. Trading member–cum–clearing member: They clear and settle their own trades as
well as trades of other trading members and custodial participants.
3. Professional clearing member: They clear and settle trades executed by trading
members.
Both trading-cum-clearing member and professional clearing member are required to
bring in additional security deposits in respect of every trading member whose trades
they undertake to clear and settle.
Clearing Members handle the responsibility of clearing and settlement of all deals
executed by Trading Members, who clear and settle such deals through them. Clearing
Members perform the following important functions:
• Clearing: Computing obligations of all his trading members i.e., determining
positions to settle.
• Settlement: Performing actual settlement
• Risk Management: Setting position limits based on upfront deposits / margins for
each TM and monitoring positions on a continuous basis.
Clearing Banks
Funds settlement takes place through clearing banks. For the purpose of settlement all
clearing members are required to open a separate bank account with Clearing
Corporation designated clearing bank for F&O segment.
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Clearing Member Eligibility Norms
• Net-worth of at least Rs.300 lakhs. The Net-worth requirement for a Clearing Member
who clears and settles only deals executed by him is Rs. 100 lakhs.
• Deposit of Rs. 50 lakhs to clearing corporation which forms part of the security deposit
of the Clearing Member.
• Additional incremental deposits of Rs.10 lakhs to clearing corporation for each
additional TM, in case the Clearing Member undertakes to clear and settle deals for
other TMs.


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