Clearing member account
Also written CM account · Broker pool account · Broker settlement account
The 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.
In plain language
An ordinary demat account holds an investor's own securities. A clearing member (CM) account is a working account. It exists so that a broker can settle trades on a stock exchange through the depository.
Selling clients deliver shares into it, and from it the broker delivers to the clearing corporation at pay-in. At pay-out, the clearing corporation credits it and the broker passes shares on to buying clients. That is why it is popularly called the broker pool account or broker settlement account.
Securities in it are kept in separate buckets by market type and settlement number, so shares meant for one settlement are not accidentally used for another.
How it works
From Chapter 4 (section 4.3) and Chapter 8 (section 8.3):
Who opens it. Brokers of stock exchanges that settle through the depository, and SEBI-registered custodians approved by stock exchanges. The type and number of accounts vary across depositories. Clearing members and brokers must open a separate beneficiary account for their own holdings.
Opening.
- NSDL: a clearing account is opened only after the depository approves it and allots a CM-BP-ID; CDSL does not use a separate CM-BP-ID.
- A broker may have only one clearing account per stock exchange, with a letter from the clearing corporation allotting a CC-CM-ID; additional CM accounts may be opened for F&O.
- CDSL: BSE brokers open a CM Principal Account and a CM USA (Pool) account; NSE and other exchange brokers open a CM Clearing or Pool account; the CM also opens an early pay-in account with the CC.
- A broker dealing on more than one exchange needs a separate set of CM accounts per exchange; the DIS must quote the CM account relevant to the exchange of the trade.
Settlement buckets. Securities sit under a specific market type and settlement number. Moving them between buckets needs an inter-settlement transfer instruction from the CM.
Shifting. In NSDL, moving a clearing account to another DP needs depository approval; the old account is closed after the new one is opened. In CDSL, no approval is needed.
Corporate actions. Balances in CM accounts are eligible for corporate benefits, which the CM holds in trust for beneficial owners; DPs must clear transit balances before record date.
A worked example
Illustrative. Mehta Stock Brokers is a member of both NSE and BSE and settles through NSDL.
| Account | Why |
|---|---|
| CM account for NSE trades (with CM-BP-ID allotted by NSDL) | Settle NSE trades |
| CM account for BSE trades | Separate set per exchange |
| Additional CM account for F&O | Permitted in addition |
| Beneficiary account | Mehta's own investments |
On Monday, client Farida sells 250 shares through Mehta on NSE.
- Farida's DIS names Mehta's NSE CM account, with market type and settlement number from her contract note.
- The 250 shares land in the bucket for that settlement.
- At pay-in, they move from the CM account to the clearing corporation.
A back-office slip: 100 shares were received into a bucket with the wrong settlement number. Mehta, as clearing member, gives an inter-settlement transfer instruction to move them to the correct bucket before pay-in.
A dividend record date falls on Tuesday while 50 shares still sit in the CM account. Mehta receives that dividend and holds it in trust for the client.
Why NISM asks about it
Chapter 8 (Trading and Settlement, 13% weightage) explains the CM account, market type, settlement number, inter-settlement transfers and pay-in/pay-out through it - its review question asks who gives inter-settlement instructions (the clearing member). Chapter 4 (Account opening, 12%) covers CM-BP-ID, one-account-per-exchange and shifting of clearing accounts. Chapter 10 covers corporate benefits on CM balances held in trust.
Common exam traps
- CM accounts are for settlement, not for the broker's own investments - those need a beneficiary account.
- One clearing account per stock exchange (additional ones allowed for F&O).
- CM-BP-ID is an NSDL concept; CDSL does not use a separate CM-BP-ID.
- Inter-settlement instructions are given by the clearing member, not the exchange, clearing house or depository.
- Shifting a clearing account needs depository approval in NSDL, not in CDSL.
- Custodians approved by exchanges can also open CM accounts.
- Corporate benefits on CM balances are held in trust for the beneficial owners.
Check yourself
1.Brokers of stock exchanges offering settlement through the depository must open a clearing member account. Apart from brokers, who else can open a clearing member account?
- a)Custodians registered with SEBI and approved by stock exchanges
- b)Any Depository Participant registered with SEBI
- c)Registrars and Transfer Agents appointed by issuers
- d)Beneficial owners who trade on more than one stock exchange
Show the answer
Answer: (a) Custodians registered with SEBI and approved by stock exchanges
The workbook: "In addition to the brokers, custodians registered with SEBI and approved by stock exchanges can open a clearing member account." These accounts are popularly known as "Broker settlement account" or "Broker pool account", and the type and number of accounts opened may vary across depositories.
Why the others are wrong:
- DPs (B) — being a DP is what lets an entity maintain accounts for others. It does not make it a clearing member of an exchange.
- RTAs (C) — they deal with the issuer side (corporate actions, demat requests) and do not settle exchange trades.
- Beneficial owners (D) — a BO settles through a broker. A client who has sold delivers securities into the CM account of the broker through whom the securities were sold. Trading on several exchanges does not change this.
2.Who is required to give inter-settlement instructions to the Participant for securities lying within the same CM account but in a different settlement pocket?
- a)The stock exchange
- b)The Clearing House
- c)The depository
- d)The Clearing Member
Show the answer
Answer: (d) The Clearing Member
Clearing Members are required to give inter-settlement instructions to the Participants for securities lying within the same CM account but in different settlement pockets.
The reason is structural: in a clearing member account, the securities are always kept in a bucket of specific market type and settlement number. Shares waiting under one settlement number cannot be used for pay-in under another until the CM moves them.
The exchange, the clearing house and the depository all sit outside this decision — only the CM knows which obligation he intends to meet from which holding.
3.The two main types of demat accounts that can be opened with a depository participant are:
- a)Savings account and current account
- b)Beneficial Owners Account and Clearing Member Account
- c)Trading account and settlement account
- d)Proprietary account and pool account
Show the answer
Answer: (b) Beneficial Owners Account and Clearing Member Account
There are mainly two types of demat accounts which can be opened with a depository participant viz., (a) Beneficial Owners Account, and (b) Clearing Member Account. The type of depository account depends on the operations to be performed.
Beneficiary Account: a beneficial owner's account is an ownership account. The holder/(s) of securities in this type of account owns the securities. The workbook's example is Mr. Ram who is a retail investor... The securities which he buys or sells will be kept in his beneficial owner account which he would have to open with a DP.
Clearing Member Account: this account is opened by a broker or by a clearing member for the purpose of settlement of trades executed on a recognised stock exchange.
Three features of the CM account to remember: the clearing member account is a transitory account · the securities in this account are held for a commercial purpose only · the securities in this account will be eligible for any corporate action benefit declared.
Option D names two of the seven categories a stock broker may maintain, which is a different classification: Proprietary Account (hold own securities) · Pool account (settlement purpose) · Client Unpaid Securities Account · Client Securities Margin Pledge Account · Client Securities under Margin Funding Account · Client Nodal Mutual Fund Overnight Scheme (MFOS) Account · Client Unpaid Securities Pledgee Account (CUSPA).
And note: clearing members and brokers have to open a beneficiary account if they have to deal with their own holdings.
Where this is taught
Free preparation for NISM Series VIRelated terms
- Delivery Instruction SlipThe signed form on which a beneficial owner instructs the DP to debit the demat account — no beneficiary account can be debited without one, whether the transfer is on-market or off-market.
- Settlement numberA unique identifier tagging a trade or batch of trades to a particular settlement cycle and date, used by brokers, clearing corporations and depositories to match and reconcile obligations.
- 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.
- Inter-depository transferA transfer of securities from an account in one depository (NSDL or CDSL) to an account in the other, possible because SEBI regulations require the two depositories to be inter-connected.
- Market transactionSettlement of a trade executed on a stock exchange, moving through a Clearing Corporation/House and the seller's and buyer's clearing member accounts — as opposed to an off-market transaction settled person-to-person.
- Standing instructionA one-time authority, usually given at account opening, for the DP to credit securities into the account without a fresh instruction each time — the alternative is a Receipt Instruction for every single receipt.
- Cash corporate actionA corporate action that distributes money - such as dividend or interest - where the depository only tells the issuer who was entitled on the record date, and the issuer or its RTA pays them directly.
- IDeASInternet-based Demat Account Statement: NSDL's viewing facility, launched January 1, 2004, showing demat balances and transactions online, not real time, with a delay of at most 30 minutes.
- Client Unpaid Securities Pledgee AccountA separate account a TM/CM opens, in whose favour an auto-pledge marked "unpaid" is created when pay-out securities go to a client who has not paid for them.
- Beneficial owner accountThe ownership demat account investors open with a DP to hold and trade securities in electronic form, distinct from a broker's clearing member account, which only holds securities in transit.
- CM-BP-IDThe identification number NSDL allots to a clearing member's settlement account, combining with the Clearing Corporation's CC-CM-ID and the DP's Client-ID to identify the account uniquely.
- Auto Delivery-outNSDL delivery-out instructions the Clearing Corporation generates automatically for authorised clearing members, based on net delivery obligations, so the member need not submit a manual DO form for pay-in.
- Auto pay-inA facility letting authorised BSE and NSE clearing members skip manual pay-in instructions, with securities in their settlement account considered for pay-in by the Clearing Corporation automatically.
- DvP agentThe agent an interoperable Clearing Corporation appoints to receive pay-out securities and transfer them onward to the settlement account of another interoperable Clearing Corporation, completing cross-CC settlement.
- Client Securities Margin Pledge AccountA dedicated demat account a Trading or Clearing Member opens to accept client securities as margin by way of pledge, the only route permitted since 1 August 2020, replacing title-transfer collateral arrangements.
- Held in trustThe status of corporate benefits an Issuer or R&T Agent pays to a Clearing Member, Clearing Corporation or intermediary holding securities on a cut-off date, pending onward distribution to the true beneficial owners.
- Password UserA SPEED-e access mode that lets a demat account holder submit delivery instructions online but only to a maximum of six pre-notified Clearing Member accounts, unlike a Smart Card/e-Token user who faces no such cap.
- Market typeThe code identifying which market segment or settlement type a trade belongs to — normal, auction, and so on — that must be recorded on the DIS alongside the stock exchange name and settlement number.
- Inter-settlement transferAn instruction by a clearing member to move securities within its CM account from one market type-settlement number bucket to another from which pay-in is actually to be effected.
- Normal pay-inA pay-in instruction, available to BSE clearing members and seller BOs, that can be given any time from the trade day up to the pay-in deadline even with no balance yet in the account, unlike early pay-in.
- Irreversible Delivery-outA manual delivery-out instruction for margin payment or exemption purposes that NSDL's Auto Delivery-out never generates automatically, requiring careful sequencing against any Auto DO for the same securities.
- SIMPLENSDL's facility letting a password-based SPEED-e user submit a Client-to-Clearing-Member Pool Account transfer instruction from a GPRS-enabled mobile phone.
- Smart Card / e-Token UserThe hardware-authenticated way of accessing NSDL's SPEED-e facility, required for any Clearing Member and carrying no cap on the number of accounts an ordinary user can instruct.
- SPICEThe SPEED-e facility letting a Clearing Member, holding a client's Power of Attorney, submit auto pay-in instructions on the client's behalf, with no paper delivery instruction from the client.
- Tender offerThe depository-system mechanism, used for takeovers, buybacks and delisting, that blocks a shareholder's securities in favour of the Clearing Corporation once a tender-offer delivery instruction is submitted.
- Clearing bankA 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.