Gross settlement
Also written Trade-for-trade settlement · Trade to trade settlement · Trade to trade obligation
A settlement method where transactions in a security are not netted: a member's security pay-in equals cumulative sell quantity and pay-out equals cumulative buy quantity, trade by trade.
In plain language
Netting is convenient, but for some securities regulators do not want the convenience. A stock under close watch for suspicious trading, for example, should have every single trade actually settled — buyers and sellers should not be able to hide behind a net figure that erases most of the day's activity.
Gross settlement, also called trade-for-trade settlement, is the answer: no netting at all. Every buy is settled as a buy; every sell is settled as a sell.
How it works
The workbook (Chapter 5, section 5.6, and Chapter 6, section 6.2) describes gross settlement this way: for certain transactions or securities, settlement is done on a gross basis — trade for trade — and there is no netting of transactions.
Under gross obligations: a member's security pay-in obligation equals its cumulative sell quantity, and its security pay-out equals its cumulative buy quantity. Funds pay-in equals the cumulative value of buy transactions, and funds pay-out equals the cumulative value of sell transactions.
Institutional investors are also required to settle on a gross basis at the custodian level — no day trading (intraday square-off) is permitted for them — even though the custodian itself continues to settle net with the exchange. Trade for Trade Surveillance (TFTS) securities are a further example of gross treatment: shortages in TFTS securities are directly closed out rather than sent to auction, and TFTS trades are excluded from mechanisms such as ICMTM.
A worked example
A trading member executes these trades during the day in a security placed under the Trade for Trade Surveillance (TFTS) category:
| Trade | Buy quantity | Sell quantity |
|---|---|---|
| 1 | 1,000 | — |
| 2 | — | 600 |
| 3 | 800 | — |
Under gross settlement, netting is not applied. The member's security pay-in obligation = cumulative sell quantity = 600 shares, and its security pay-out = cumulative buy quantity = 1,800 shares (1,000 + 800) — two separate obligations, not one net figure of 1,200 shares receivable.
Compare this to the same three trades in a security under netted obligation: there, the buy and sell quantities would first be netted to a single 1,200 shares receivable, with no separate delivery or receipt legs at all.
Why NISM asks about it
Chapter 5 (section 5.6) and Chapter 6 (section 6.2) both introduce gross settlement as the alternative to netted obligations, and Chapter 4's margining rules repeatedly return to it — VaR, extreme loss and MTM margins on TFTS securities are computed without any netting, and TFTS margin rates are set at a flat 100% of the security's VaR and extreme loss margin combined. Expect gross settlement tested both as a settlement-obligation concept and as the reason certain margins are set so high.
Common exam traps
- Gross settlement means NO netting, of either securities or funds — every buy and every sell counts separately.
- TFTS securities carry a combined VaR + ELM margin of 100%, reflecting the higher risk that justifies gross treatment in the first place.
- Institutional investors settle gross at custodian level, but the custodian still nets with the exchange — gross treatment applies at the client-to-custodian layer, not necessarily all the way through.
- Do not confuse gross settlement (a securities settlement method) with a gross open position (the risk-management figure obtained by adding, not netting, positions across clients) — the two share the word "gross" but measure different things.
Where this is taught
Free preparation for NISM Series VIIRelated terms
- Foreign Portfolio InvestorAn entity established or incorporated outside India that proposes to invest in India, registered under the SEBI (Foreign Portfolio Investors) Regulations, 2019 as Category I or II.
- Multilateral nettingThe clearing corporation's method of collapsing every trade a clearing member did in a settlement into one net figure per security and one net funds figure, so each member either pays in or receives a pay-out.
- Netted obligationA settlement method in which all of a member's purchase and sale transactions in a security are netted into one pay-in or pay-out figure, rather than settled trade by trade.
- Open positionAn outstanding, unsettled long (buy) or short (sell) position in a contract; margins, exposure limits, daily MTM and corporate-action adjustments are all applied to open positions.
- 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.
- Mark to Market (MTM) loss marginIn the cash segment, one of three margins a clearing corporation collects upfront: the loss on a member's outstanding settlement obligations, marked to the closing price, grossed across all clients.