Clearing
Also written Clearing process · Trade clearing
The daily accounting step that reconciles what every party owes and is owed on its open and closed positions, and turns a day of trades into one net obligation per member.
In plain language
A trade is not finished when it is matched. Between the match and the money there is a step that nobody sees, and that step is clearing.
Clearing works out the arithmetic. It takes every trade a member did today, every position carried in from yesterday, every mark-to-market gain and loss, and every margin already lodged, and reduces the whole pile to a single number: pay this much in, or expect this much out, tomorrow morning.
Settlement is the money actually moving. Clearing is deciding how much has to move. The workbook keeps the two apart and so should you.
How it works
Automated at every exchange, the cycle runs three times a day around the trading session.
Pre-trading: member margin limits are uploaded to the trading system, and the obligation and margin file is uploaded to the clearing bank. Margins are verified. These files already fold in commodity futures, options on futures, options on goods and index futures together.
Intra-trading: funds collected against margins and obligations are tracked, open position limit utilisation is monitored, and members' requests to increase or release margin are processed.
Post-trading: clearing members' positions are computed from open interest at the client level, trades are processed, reports are generated, margins and MIS are updated, and pay-in and pay-out instructions are issued.
After the session, members download files over FTP carrying the day's transactions, positions carried forward, the closing position and the net obligation report — which itself shows margin deposit, margin utilised, available deposit, the pay-in or pay-out due, and transaction fees payable or receivable.
Every clearing member holds two accounts with a clearing bank: a settlement account and a client account. All debit and credit instructions are effected in the settlement account.
A worked example
The workbook's own two-member example, priced out.
Clearing members A and B. X is a client of A; Y is a client of B. X buys one gold futures contract — lot 1 kilogram — from Y at Rs 50,000 per 10 grams.
Contract value = 100 units of 10 g x Rs 50,000 = Rs 50,00,000
Margin at 5%, blocked from BOTH X and Y = Rs 2,50,000 each
The margin is blocked in real time from the clearing member, who in turn blocks it from the client. Nobody has paid anybody yet.
At the end of the day the closing price is Rs 50,100 per 10 grams.
| Position | Move | MTM | |
|---|---|---|---|
| X (long, via A) | Bought at 50,000 | +Rs 100 per 10 g | +Rs 10,000 |
| Y (short, via B) | Sold at 50,000 | +Rs 100 per 10 g | −Rs 10,000 |
Y pays in Rs 10,000 on T+1; X receives exactly that Rs 10,000 on T+1. The clearing corporation is not a source of funds — it is a conduit. On any day, across the whole exchange, the MTM losses collected equal the MTM gains paid out.
Repeat this every day until expiry, and the accumulated MTM has already moved the entire price difference. Which is why, at delivery, the bill is raised at the Final Settlement Price and not at the traded price: the gap was settled long ago.
Why NISM asks about it
Chapter 7 (Clearing, Settlement and Risk Management), sections 7.1 and 7.2. Expect definition questions separating clearing from settlement, the pre/intra/post-trading checklist, and the two-account rule — a settlement account and a client account, with all instructions hitting the settlement account.
Common exam traps
- Clearing is the accounting; settlement is the transfer. A question describing "matching the outstanding buy and sell instructions and transferring ownership against funds" is describing settlement.
- The clearing corporation is not the exchange. Both are governed by the SECC Regulations, 2012, but the entity that guarantees settlement is the clearing corporation.
- MTM is netted at the member level, but positions are computed from open interest at the client level. Getting the level wrong produces the wrong number.
- Margins are blocked on both sides of a trade, not just on the side that is losing.
- Pay-in and pay-out of MTM happen on T+1, before trading starts. If MTM is not collected in time, the exchange scales initial margin up by a factor of the square root of two.
- All debits and credits go through the settlement account, not the client account.
Check yourself
1.In the clearing and settlement of commodity derivatives, how are the transfer of commodity ownership and the fund obligations handled?
- a)Both are netted at the client level and then netted again across members at exchange level
- b)Commodity transfers are netted at member level, while fund obligations are settled gross at client level
- c)Commodity transfers are settled on DVP by netting at the client level and grossing up at the member level, while fund obligations are netted at the member level
- d)Both are settled gross, trade by trade, with no netting at any level
Show the answer
Answer: (c) Commodity transfers are settled on DVP by netting at the client level and grossing up at the member level, while fund obligations are netted at the member level
The workbook's words: "Transactions involving transfer of ownership of commodities are settled on DELIVERY-VERSUS-PAYMENT (DVP) basis by NETTING AT A CLIENT LEVEL AND GROSSING UP AT THE MEMBER LEVEL, whereas FUND OBLIGATIONS ARE NETTED AT THE MEMBER LEVEL to reduce the number of settlement transactions as part of the clearing process." So option (c) is right.
Why the two are treated differently: goods belong to a particular client. One client's delivery cannot cancel out another client's receipt, so goods are netted per client and then added up (grossed) for the member. Money is interchangeable, so the member's fund obligation can be netted across all its clients. That reduces the number of payments.
Why the others are wrong: (a) nets goods across members, which would mix up different owners' goods. (b) swaps the two treatments. (d) ignores netting completely, although the workbook says netting is there "to reduce the number of settlement transactions."
Clearing vs settlement: clearing is "the process of accounting to update and reconcile obligations/payments". Settlement "involves matching the outstanding buy and sell instructions, by transferring the commodities ownership against funds between buyer and seller AT THE EXPIRY of the contract."
2.A clearing corporation must follow a transparent process to accredit assayers. With whose approval is the accreditation done?
- a)SEBI's Market Regulation Department
- b)The Risk Management Committee of the clearing corporation's Board of Directors
- c)The Warehousing Development and Regulatory Authority
- d)The exchange's Product Advisory Committee
Show the answer
Answer: (b) The Risk Management Committee of the clearing corporation's Board of Directors
The workbook's words: "The clearing corporation shall follow a TRANSPARENT PROCESS for accreditation of assayers and the accreditation shall be done WITH THE APPROVAL OF THE RISK MANAGEMENT COMMITTEE OF THE BOARD OF DIRECTORS OF THE CLEARING CORPORATION." So option (b) is right.
Why the others are wrong:
- (a) SEBI sets the norms. It does not approve individual assayers.
- (c) WDRA registers warehouses (each warehouse separately, the workbook notes). It does not accredit assayers.
- (d) The Product Advisory Committee deals with contract design and modification (Chapter 6). It has no role in assayer accreditation.
Other assaying norms:
- Assayers must "work independently", under SOPs prescribed by the clearing corporation.
- Assayers should preferably be certified by bodies such as NABL or BIS.
- Each warehouse must "assign a special place to store the samples" for further testing.
- The WSP must accept only goods that meet "the quantity and quality parameters as per the exchange contract specifications."
3.Priya, a client of clearing member A, buys one gold futures contract (lot size 1 kg) at ₹61,200 per 10 grams from Sameer, a client of clearing member B. The day's closing price is ₹61,050 per 10 grams. Following the workbook's method, what is the mark-to-market settlement?
- a)Priya pays ₹1,500 and Sameer receives ₹1,500 on T+1
- b)Priya pays ₹15,000 on T+1, and the same amount is paid out to Sameer
- c)Sameer pays ₹15,000 on T+1, and the same amount is paid out to Priya
- d)Nothing is settled until expiry, because the loss is only notional
Show the answer
Answer: (b) Priya pays ₹15,000 on T+1, and the same amount is paid out to Sameer
Working, using the workbook's method:
- Price difference: ₹61,200 − ₹61,050 = ₹150 per 10 grams.
- Lot: 1 kg = 1,000 grams = 100 units of 10 grams (the workbook's "X 100 as the lot size is of 1 kg").
- MTM: ₹150 × 100 = ₹15,000.
Who pays: Priya is long and the price closed below her entry, so she has the loss. The workbook's rule: "If the closing price is LOWER than the entry price, THE BUYER HAS TO PAY the MTM margin (loss)." Sameer is short and gains. In the workbook's example, "the PAY-IN FROM Y IS THE PAY-OUT TO X" — the loser's pay-in is the winner's pay-out. The amount is settled on T+1.
So option (b) is right.
Why the others are wrong:
- (a) multiplies by 10 instead of 100. A 1 kg lot has 100 units of 10 grams.
- (c) has the right amount but the wrong direction. A falling price hurts the long.
- (d) Losses are called "notional" because the position is still open, but they are still settled daily: "on every trading day till the expiry... there is some amount of MTM gain equal to MTM loss" to be settled through the clearing members.
Where this is taught
Free preparation for NISM Series IVRelated terms
- NovationThe clearing corporation stepping into the middle of every trade — becoming the buyer to every seller and the seller to every buyer — so that neither side carries the other's default risk.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- Mark to MarketThe daily settlement of a futures position at that day's closing price, so gains and losses are paid in cash every evening instead of accumulating until expiry.
- SettlementThe step where the obligations computed by clearing are actually discharged — commodities against funds on a delivery-versus-payment basis, or cash against the settlement price.
- Trading cum clearing memberA clearing member who is also a trading member of the exchange, and may clear and settle its own trades, its clients' trades, and the trades of other trading members and custodial participants.
- Net obligation reportThe end-of-day report giving a trading member's net obligation, margin deposit, margin utilised, available deposit, the pay-in or pay-out required and the transaction fee payable or receivable.
- Principal riskThe risk of having paid or delivered without receiving the other side — the settlement half of counterparty risk, eliminated by a central counterparty acting through novation.