Clearing bank
Also written Clearing banks
A bank empanelled by the clearing corporation, where every clearing member keeps a dedicated clearing account through which all funds pay-in, pay-out, margin and collateral movements are made.
In plain language
Shares settle through the depositories. Money settles through clearing banks.
Every clearing member must open an account at one of the banks the clearing corporation has empanelled, at a designated branch. That account is not an ordinary current account. The member signs an irrevocable authorisation letting the clearing bank debit and credit it purely on the clearing corporation's instructions.
On pay-in day, the clearing corporation tells the bank how much to take from each member's account. On pay-out day, it tells the bank how much to credit. The member's job is only to make sure the money is there in time.
How it works
From Chapter 5 (sections 5.3 and 5.4) and Chapter 6 (section 6.3):
- A clearing member must maintain a separate and distinct primary clearing account with a designated clearing bank, and a separate one for each segment.
- The clearing accounts are to be used exclusively for clearing and settlement operations: settlement of funds obligations, payment of margins, release and enhancement of collateral, early pay-in of funds, penal charges and so on.
- Funds can be deposited in any form, but withdrawn only in the member's own name.
- The member irrevocably authorises the clearing bank to access the account for debits and credits as the clearing corporation instructs, and to report balances and other information to the clearing corporation.
- A member may keep additional clearing accounts with the designated bank for enhancing cash collateral and making early pay-in of funds.
- The clearing corporation passes pay-in obligation details to the banks, which debit the members; on pay-out instructions, the banks credit the receiving members.
- Clearing banks must provide the minimum services specified by the clearing corporation.
In the T+1 schedule, funds pay-in is completed up to about 11:00 a.m. and funds pay-out by 1:30 p.m. A member with a funds shortage faces penal interest of not less than 0.07% per day, and possibly withdrawal of trading facility.
A worked example
Illustrative figures. Sunrise Securities is a trading-cum-clearing member in the cash and F&O segments. It holds:
| Account at the designated clearing bank | Purpose |
|---|---|
| Primary clearing account - cash segment | Cash market pay-in/pay-out, margins |
| Primary clearing account - F&O segment | Daily MTM, premium, final settlement |
| Additional clearing account | Cash collateral top-ups and early pay-in |
On Thursday its net cash-segment funds obligation is Rs 4.75 crore to pay. By Thursday morning Sunrise moves Rs 4.75 crore into the cash-segment primary account. At pay-in the clearing corporation sends the bank a debit instruction; the bank debits Rs 4.75 crore and credits the clearing corporation. Sunrise does not write a cheque or initiate a transfer to the clearing corporation itself.
On the same day it is due Rs 60 lakh of F&O MTM profit. The clearing corporation sends a pay-out instruction, and the bank credits the F&O primary account. Sunrise cannot set the Rs 60 lakh against the Rs 4.75 crore - they are separate segment accounts.
Why NISM asks about it
Chapter 5 (Clearing Process) has a dedicated section 5.3, "Clearing Banks and their function", and returns to the clearing account in section 5.4; Chapter 6 (section 6.3, Settlement of Funds) repeats the account rules. A Chapter 5 sample question asks for the major role of clearing corporations, and the pay-in/pay-out routing (funds via clearing banks, securities via depositories) sits right beside it.
Common exam traps
- Funds go through clearing banks; securities go through depositories. The distractors swap them.
- Deposit in any form, withdraw only in self-name. Not "withdraw in any name".
- One primary clearing account per segment, not one for all segments.
- The authorisation is irrevocable and the bank acts on the clearing corporation's instructions, not the member's.
- The clearing account is for clearing and settlement only - not for the broker's general business payments.
- Interoperability links clearing corporations, not clearing banks.
Where this is taught
- Series IV · Chapter 7: Clearing, Settlement and Risk Management of IRDintroduced here
- Series VII · Chapter 5: Clearing Processintroduced here
- Series VIII · Chapter 7: Clearing, Settlement and Risk Managementintroduced here
Related terms
- InteroperabilityA clearing member choosing one clearing corporation to clear and settle everything it trades, across all exchanges, instead of being tied to a separate clearing corporation per exchange.
- Pay-inThe leg of settlement in which clearing members hand over what they owe: funds into the clearing corporation through the clearing bank, and securities into its pool account through the depository.
- Pay-outThe leg of settlement in which the clearing corporation releases what members are owed: funds credited to their clearing bank accounts, and securities now credited directly to the client's demat account.
- 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.
- Early pay inDelivering securities to the clearing corporation's early pay-in account ahead of the pay-in deadline, mainly to earn margin exemption; now usually done by blocking shares in the client's own demat account.
- Clearing member accountThe special demat account a broker or custodian opens to settle exchange trades, through which clients' sold shares go to the clearing corporation and bought shares arrive; also called the pool account.
- UpstreamingThe SEBI framework requiring stock brokers and clearing members to transfer all client funds to the clearing corporation by end of day, as cash, a lien on a bank FD, or units of a Mutual Fund Overnight Scheme.
- USCNBAThe bank account in which a stock broker or clearing member must receive all client funds, named "Name of the SB/CM – USCNB account" under SEBI's standardised bank account nomenclature.
- 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.