What is the role of Clearing Corporations in Trading and Settlement? | Motilal Oswal

Hi,
In the stock market, there is always a buyer, and a seller, where one person is buying a certain number of shares, there is another person who sells the shares.
When a trade is settled, the buyer receives some securities, and the seller receives their worth in the form of money. To complete the transaction of buying and selling the share, the clearing corporation acts as a facilitator. It completes the process of receiving and delivering shares or funds to the buyer and seller in the market. In this video, we will understand the role of clearing corporations in trading and settlement.
Without a clearing corporation, it is impossible to do trade in the stock market. This led to the establishment of the National Stock Exchange i.e. NSE Clearing Limited, the first clearing corporation in India. It was established in August 1995 as a wholly-owned subsidiary of the NSE. It also became the first one to introduce a settlement guarantee.
The main objectives of the clearing corporation include –
To bring and sustain confidence in clearing and settlement of securities;
To maintain short but consistent settlement cycles; and
To provide counterparty risk guarantee.
It also provides a financial guarantee for all transactions executed on the exchange and provides risk management functions. A transaction can only happen when a buy order matches a sell order and a trade is generated. After the trade generation, Clearing Corporation performs all of the necessary steps leading to the settlement. This involves updating the accounts of parties involved and arrangement of transfer of share and money.
After that, there is a Settlement period where the actual exchange of shares for money happens. A clearing corporation will participate in all these stages to ensure the confirmation, settlement and delivery of the transaction. Its key role involved in trading and settlement are - trade recording, trade confirmation, determination of obligation, pay-in and pay-out of funds and securities etc. It also conducts a background check on the financial strengths of the traders involved in transactions in order to avoid failure of performance or partial fulfillment of obligations. Clearing Corporation helps in improving market efficiency, ensuring transparency, liquidity and risk management. During settlement, Clearing Corporation performs concrete risk management to cover its members from procedural losses. Also it covers liquidity risk, one of the major risks arising out of the settlement process and ensures that liquidity is maintained for both funds and securities. Clearing corporation acts like a protective umbrella for all the market transactions with an efficient risk management system. It ensures proper transfer, ownership of share and the transfer of money involved from the buyer to the beneficiary.

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