Clearing and settlement

95 terms · each links to a full explanation with a worked example and the exam traps

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.
Bad deliverySecurities that are delivered for settlement but rejected by the depository for technical reasons such as incorrect signatures, names or details — treated like a short delivery and closed out through auction.
Block mechanismBlocking of shares in a selling client's own demat account in favour of the clearing corporation, instead of moving them out, to give early pay-in benefit; mandatory for early pay-in since 14 November 2022.
Both optionsA commodity futures settlement type in which physical delivery happens only if both the buyer and seller agree to it — if either declines, the open position is cash-settled at the Due Date Rate instead.
Buy-in auctionThe auction a clearing corporation runs through the exchange system on settlement day to buy shares a selling member failed to deliver, so the buying member still receives them.
Cash componentThe part of a clearing member's collateral deposit held as cash, bank guarantees, fixed deposit receipts, T-bills or dated government securities — as opposed to the non-cash component.
CCILThe Clearing Corporation of India Ltd, the central counterparty that guarantees settlement of government securities, repo and OTC interest rate derivative trades by novation.
Central counterpartyThe clearing corporation that interposes itself in every exchange trade, becoming buyer to every seller and seller to every buyer, so neither side carries the other's credit risk.
Cheapest-to-deliverThe bond in the deliverable basket that costs a futures seller least to deliver — and, because the seller chooses, the bond whose cash price the futures contract actually tracks.
ClearingThe 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.
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.
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.
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.
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.
Close outSettling an undelivered sale in cash instead of shares: the defaulting seller is charged at a penal close-out price, used when an auction finds no sellers or is not held at all.
Closing Auction SessionA 20-minute call auction session, from 3:15 pm to 3:35 pm, being phased in to determine the closing price of stocks that have derivative contracts, replacing the last-30-minutes VWAP method for them.
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.
Commodity repositoryA WDRA-approved entity — currently NERL (NCDEX's) and CDSL Commodity Repository Ltd (CDSL's) — that electronically records and transfers title to warehoused commodities through negotiable warehouse receipts.
Compulsory deliveryA delivery logic under which every position still open at expiry must give or take physical delivery — neither side can elect to settle in cash.
Conversion factorThe multiplier that scales a futures settlement price into a fair invoice price for each bond in the deliverable basket, by valuing that bond at the notional 7% yield.
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.
Daily premium settlementThe daily process that nets each client's option premium payable against receivable and settles the difference through the clearing member's bank account on T+1.
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.
Default waterfallThe fixed order in which a clearing corporation uses its resources to cover a member default: defaulter's money first, then insurance, its own capital, the Core SGF, and last a haircut to pay-outs.
Deliverable grade securitiesThe government securities a seller is permitted to deliver against a physically settled bond futures contract — GOI bonds of 7.5 to 15 years from the delivery month with at least Rs 10,000 crore outstanding.
Delivery default penaltyThe SEBI-prescribed charge on a seller who fails to deliver against an expiring contract — a fixed percentage of the settlement price plus a replacement cost, most of which is paid over to the buyer.
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.
Delivery marginsMargins levied on potential in-the-money long option positions and deliverable futures positions in the run-up to expiry, staggered from 20% four days before expiry to 80% one day before.
Delivery notice periodA window, unique to commodity futures, in which a seller may give notice of intent to deliver — giving the buyer time to arrange finance, transport and warehouse logistics before physical delivery.
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.
DvP-IIIThe net-basis delivery-versus-payment mode RBI uses to settle outright secondary market trades in Government Securities, with CCIL as central counterparty and settlement on a T+1 (T+2 for FPIs) cycle.
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.
eNWRThe dematerialised form of a warehouse receipt, issued by a WDRA-regulated repository against commodity stock, that can be pledged for finance and transferred to settle exchange trades without moving the goods.
Exercise settlement valueThe intrinsic value of an option at expiry or exercise — the final settlement price of the underlying minus the strike for a call, or the strike minus that price for a put.
Exposure marginA derivatives-segment margin charged as a percentage of the notional value of an open position, on top of initial margin; on options it is collected only from sellers.
Extreme Loss MarginA flat 3.5 per cent margin collected on cash-market positions to cover losses falling outside what the VaR margin is designed to capture.
Final Settlement PriceThe price at which a commodity derivative is finally settled at expiry — a simple average of the polled spot prices of the expiry day and the two days before it.
FSP fallback methodsThe ladder an exchange climbs down when polled spot prices are missing at expiry — a shortened average back to E-3, an alternate basis-centre price, extrapolation, futures prices, then the last available poll.
Gross settlementA 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.
Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
Initial Margin AccountThe ledger account in a client's own books that records initial and additional margin paid on equity index or stock futures, shown as a current asset until the margin is released.
Instruction IDThe unique number the DP system generates for each off-market delivery instruction it enters, which the DP writes on the instruction slip for future reference.
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.
Internal shortageA shortage that arises inside a single member's book when a selling client fails to deliver shares that were netted off against a buying client's purchase, so no obligation reached the clearing corporation.
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.
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.
Intraday Crystallised LossesA margin the clearing corporation levies in real time on losses that become certain intraday when a trade closes out an open futures position, computed on weighted average trade prices.
Invocation-cum-redemptionA single-instruction functionality for invoking margin-pledged mutual fund units not traded on an exchange, moving them to the TM/CM's Client Securities Margin Pledge Account and auto-redeeming them there.
Invoice priceThe cash a buyer pays the seller on physical delivery: the futures settlement price multiplied by the delivered bond's conversion factor, plus its accrued interest, scaled by the contract amount.
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.
MarginThe money a buyer or seller must deposit before a trade is allowed to stand, so that the clearing corporation is covered if they fail to bring in funds or to deliver securities.
Margin on consolidated crystallized obligationPart of initial margin that blocks a client's net payable from closed-out futures profit or loss and option premium intraday, and all settlement obligations at end of day, until settlement.
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.
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.
Mark-to-Market Margin AccountThe ledger account in a client's own books that records the daily settlement payments and receipts on futures positions, with any debit balance provisioned for under the prudence principle.
Minimum Required CorpusThe minimum size of a segment's Core Settlement Guarantee Fund, reset every month from the previous month's daily stress-test losses and shared among the clearing corporation, exchange and members.
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.
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.
Net Settlement of cash and F&OSEBI's mechanism, from November 30, 2022, of netting cash-segment obligations with physical-settlement obligations of expiring stock derivatives into one settlement.
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.
Non-cash componentThe part of a clearing member's collateral deposit held as approved demat securities and other non-cash forms — capped so it cannot exceed 50% of total liquid assets.
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.
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.
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.
Peak marginThe highest intraday margin requirement of a client, measured from at least four clearing corporation snapshots a day; brokers are penalised if collected margin falls short of it.
Physical settlementSettling a derivative on expiry by actual delivery of the underlying shares against payment. In India, all stock futures and options open at expiry have been physically settled since October 2019.
Pledge release for early pay-inA single-instruction functionality that releases a client's margin-pledged or CUSPA-pledged securities and sets up early pay-in for them immediately, when the client sells shares already pledged as margin.
Premium and discount for qualityThe price adjustment when delivered goods differ from the contract's quality specification — a 1:2 discount on castor seed below 47%, and contract rate times 999/995 for .999 gold on a .995 basis.
Premium marginA margin charged at client level on option buyers equal to the premium they owe the clearing corporation, levied until the premium settlement pay-in is complete.
Price Scan RangeThe probable one-day price change used in SPAN margining — based on 6 standard deviations, subject to a minimum percentage of the underlying (1.50% for USDINR).
Principle of least errorThe rule behind the spot polling algorithm — the final polled price is the figure with the least standard deviation against the set of polled prices, similar to the least square method of regression.
Professional Clearing MemberA clearing member — typically a bank or custodian — who clears and settles trades for other trading members and institutional clients but is not itself a trading member of the exchange.
Receipt InstructionThe form a transferee submits to its own DP to accept one specific incoming credit into its demat account, needed only when no blanket Standing Instruction is already on file.
Replacement costThe part of a seller's delivery-default penalty measured against the market — the gap between the settlement price and the actual spot price the non-defaulting buyer would need to pay to replace the missed delivery.
Repository ParticipantThe intermediary — a bank, financial institution or other licensed entity — through which a depositor opens the demat account needed to hold electronic negotiable warehouse receipts with a commodity repository.
Risk arrayThe set of scenarios SPAN evaluates to estimate the maximum likely loss a derivative position could suffer over the next trading day, which is what initial margin is sized to cover.
Self-clearing memberA trading member who is also a clearing member, but may clear and settle only his own proprietary trades and his own clients' trades — never the trades of other trading members.
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.
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.
Settlement Guarantee FundA fund held by the clearing corporation, built from contributions by the exchange, the clearing corporation and clearing members plus a share of settlement penalties, used to complete settlement if a member defaults.
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.
Short deliveryA member's failure to pay in securities, fully or partly, on the settlement day — closed out at the shares' last closing price and made good by the clearing corporation through an auction.
Staggered delivery periodThe window before expiry in which buyers and sellers holding open positions may mark an intention to give or take delivery, spreading deliveries out instead of stacking them on expiry day.
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.
Straight Through ProcessingElectronic 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.
T+2 rolling settlementThe settlement cycle the booklets teach: trades on day T are settled two working days later, so a Monday trade settles on Wednesday. India has since moved to T+1.
Trade Guarantee FundA fund every active exchange member contributes to at inception, used to guarantee settlement of members' bona fide transactions and protect investor interests.
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.
Unified Payment InterfaceInstant 24x7 money transfer from a smartphone using a Virtual Payment Address. It can also block money for an IPO application, up to Rs 2 lakh per transaction in the booklet.
Valuation debitThe amount a member is debited when it fails to deliver securities on pay-in day, equal to the shortfall quantity valued at a valuation price fixed by the clearing corporation.
Value at Risk (VaR) marginThe cash-market margin set as a multiple of a stock's volatility and expressed as a percentage of its price, so more volatile shares need a bigger upfront deposit; rates update at least five times a day.
Vintage allocationThe rule for assigning physical delivery of a maturing GOI bond futures contract to long position holders, oldest client-level position first, with random allocation only among holders of the same vintage.
WSP trading prohibitionThe bar on a WSP, its management, relatives and group concerns from trading, directly or indirectly, in the exact commodity it is accredited to store — with no exemption ever given.