Straight Through Processing
Also written STP · Straight Through Processing (STP)
Electronic processing of a trade in one pass from deal to final settlement through a single system, without manual re-entry; mandatory for institutional trades since 2004.
In plain language
When an insurance company buys shares, several parties touch the trade: the broker, the institution's back office, its custodian and the clearing corporation. If each one retypes the details, errors creep in and settlement slows down.
Straight Through Processing (STP) removes the retyping. The workbook defines it as a mechanism that automates the end-to-end processing of transactions, using a single system to control the whole workflow across the front, middle and back office and the general ledger. Put simply, the trade is electronically captured and processed in one pass, from the first "deal" to final settlement.
How it works
The mandate. In 2004 SEBI required that all institutional trades executed on the stock exchanges be processed through STP (circulars dated April 1, 2004 and June 10, 2004). It is mandatory for institutional investors to follow the transaction workflow in the June 10, 2004 circular.
How it fits institutional settlement (Chapter 5, section 5.6.1)
- Institutions settle through a custodian and trade with a CP code entered at order entry.
- The broker issues a contract note in electronic form, in the SEBI format, to the custodian and/or the institutional investor.
- The custodian confirms or rejects the trade. Rejected trades are settled on a DVP basis and may attract penalties.
T+1 timeline for custodian-settled trades
| When | Step |
|---|---|
| T, up to 4:15 p.m. | Modification of CP code |
| T, up to 8:00 p.m. | Obligation Transfer Request for INST trades |
| T+1, up to 7:30 a.m. | Custodial confirmation |
| T+1, up to 9:00 a.m. | Final obligation to custodian |
Benefits the workbook lists: orders processed, confirmed and settled in a shorter time, more cost-effectively and with fewer errors; a flexible infrastructure that supports e-business expansion through online processing and access to enterprise data.
A worked example
Trade figures are illustrative; the timings are the workbook's.
An insurance company places an order through a broker on Wednesday (T) to buy 50,000 shares at Rs 820, a trade value of 50,000 × Rs 820 = Rs 4,10,00,000.
- Wednesday, trading hours: the broker enters the order with the insurer's CP code. The trade executes.
- Wednesday: the broker's system generates an electronic contract note in SEBI's format and sends it to the custodian and the insurer. Nobody retypes the price, quantity or ISIN.
- Wednesday, by 4:15 p.m.: last chance to correct the CP code if it was wrong.
- Thursday (T+1), by 7:30 a.m.: the custodian, reading the same electronic record, confirms the trade.
- Thursday, by 9:00 a.m.: the final obligation of Rs 4.10 crore reaches the custodian, which pays in on T+1.
Without STP the insurer's back office would key the trade in again, the custodian would key it a third time, and any mismatch (say 5,000 shares instead of 50,000) could lead to rejection and DVP settlement with penalties.
Why NISM asks about it
Chapter 3 (section 3.1.4, Affirmation and Confirmation for institutional clients) defines STP and gives the 2004 mandate and its benefits. Chapter 5 (section 5.6.1, Settlement of Institutional Transaction in Cash Segment) places STP inside custodial settlement with the electronic contract note and the T+1 timeline. Expect questions on the year of the mandate, which trades it covers (institutional) and what "one pass from deal to settlement" means.
Common exam traps
- STP was mandated for institutional trades, not for all retail trades.
- Year: 2004 (April 1 and June 10 circulars).
- Single system across front, middle and back office and the general ledger. It is not just faster order entry.
- Custodial confirmation is by 7:30 a.m. on T+1; CP code modification closes at 4:15 p.m. on T.
- A rejected institutional trade is settled DVP and may be penalised.
Check yourself
1.In 2004, SEBI mandated that all institutional trades executed on the stock exchanges be processed through:
- a)The Direct Market Access facility
- b)The Straight Through Processing (STP) system
- c)The block deal window
- d)The call auction mechanism
Show the answer
Answer: (b) The Straight Through Processing (STP) system
In 2004, SEBI had mandated that all the institutional trades executed on the Stock Exchanges should be processed through the Straight through Processing (STP) system. That is option B.
STP is a mechanism that automates the end-to-end processing of transactions of the financial instruments. It involves use of a single system to process or control all elements of the work-flow of a financial transaction, including what is commonly known as the Front, Middle, and Back office, and General Ledger — capturing and processing transactions in one pass, from the point of first deal to final settlement. It avoids manual entry and re-entry of the details of the same trade by different market intermediaries.
Option A is an order-access facility (introduced in 2008), not a post-trade processing system. Option C is a separate trading window for large trades, set up in September 2005. Option D is a price-discovery mechanism. None of them is the post-trade processing mandate the question describes.
2.After a run of holidays, two settlements fall due on the same day. Under the guidelines for settlement of transactions in case of holidays, how must the clearing corporations handle them?
- a)Clear and settle them on a sequential basis — the pay-in and pay-out of the first settlement are completed before the pay-in and pay-out of the subsequent settlement begin
- b)Merge both settlements into one netted settlement with a single pay-in and a single pay-out
- c)Postpone the later settlement to the next working day, so that only one settlement is run per day
- d)Run both pay-ins together first, and then run both pay-outs together
Show the answer
Answer: (a) Clear and settle them on a sequential basis — the pay-in and pay-out of the first settlement are completed before the pay-in and pay-out of the subsequent settlement begin
The workbook says: “The CCs shall clear and settle the trades on a sequential basis i.e., the pay-in and the pay-out of the first settlement shall be completed before the commencement of the pay-in and pay-out of the subsequent settlement(s).”
The reason is practical: “The cash or securities pay out from the first settlement shall be made available to the member for meeting his pay-in obligations for the subsequent settlement(s).” That only works if the first pay-out is finished before the next pay-in starts. And “the CCs and depositories shall follow a strict time schedule to ensure that the settlements are completed on the same day.”
Why the others are wrong:
- Merging into one netted settlement — the settlements keep their identity; they are run one after the other, not combined.
- Postponing to the next working day — the rule is the opposite: both are completed on the same day.
- Both pay-ins first, then both pay-outs — this would stop the member from using the first pay-out to meet the second pay-in, which is exactly what the guideline is designed to allow.
Where this is taught
Free preparation for NISM Series VIIRelated terms
- Contract noteThe legal record of a trade a stock broker executed for a client on an exchange, issued within 24 hours in the exchange-prescribed format, physically or as a digitally signed electronic contract note.
- 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.
- CustodianThe SEBI-registered entity that holds a fund's securities in accounts of its own and settles its trades, so the assets sit somewhere other than with the manager who decides what to buy.
- Custodial participantA client allowed to trade through several trading members while clearing and settling through a single clearing member, identified by a unique CP code; its CM must confirm the trades.
- Settlement cycleThe time window, fixed by the exchange, within which securities and funds for a trade must be delivered — T+1 in Indian secondary markets since 27 January 2023, meaning one trading day after the trade.
- Direct Market AccessA facility, introduced by SEBI in 2008 for institutional investors, that lets a client send orders straight into the exchange trading system through the broker's infrastructure without manual intervention by the broker.
- INST tradeA trade entered with the placeholder Custodial Participant code "INST" for an institutional client, later allocated by the back office to the client's actual sub-schemes within a fixed time window.