Trading cum clearing member
Also written Trading member-cum-clearing member · Trading Member-cum-Clearing Member · TCM · Trading cum Clearing Member (TCM)
A 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.
In plain language
Every derivatives trade has to be cleared and settled through a clearing member of the clearing corporation. The workbook describes three kinds, and the trading cum clearing member (TCM) is the one that does everything.
It is a clearing member who is also a trading member of the exchange. Such a member may clear and settle its own proprietary trades, its clients' trades, and the trades of other trading members and custodial participants.
Compare the other two. A self clearing member is also a trading member but may clear only its own and its clients' trades — never another trading member's. A professional clearing member clears for trading members and institutional clients but is not a trading member at all; typically banks or custodians become PCMs.
How it works
Functions (Chapter 7, section 7.1). A clearing member performs:
- Clearing — computing the obligations of all its trading members, i.e. determining positions to settle.
- Settlement — performing actual settlement.
- Risk management — setting position limits based on upfront deposits and margins for each trading member, and monitoring positions continuously.
Funds settle through a clearing bank; every clearing member must open a separate account with a clearing-corporation-designated clearing bank for the F&O segment.
Extra deposits for clearing others. Both trading-cum-clearing members and professional clearing members must bring in additional security deposits in respect of every trading member whose trades they clear.
Eligibility norms:
| Requirement | Amount |
|---|---|
| Net worth, clearing member | At least Rs 300 lakh (Rs 3 crore) |
| Net worth, member clearing only his own deals | Rs 100 lakh (Rs 1 crore) |
| Deposit with clearing corporation | Rs 50 lakh, part of security deposit |
| Additional deposit per additional TM cleared | Rs 10 lakh |
| Liquid net worth | At least Rs 50 lakh |
Clearing members furnish an auditor's certificate for net worth every 6 months. Their total liquid assets must be at least 50% cash component. Net worth for clearing members is prescribed by SEBI; for trading members it is decided by the exchanges, and SEBI has not specified one.
Controls over the TMs it clears for. A clearing member clearing for others can set the maximum collateral limit towards initial margins for each trading member and custodial participant, through the trading system; the limit applies for that day unless modified.
A worked example
Computing a clearing member's open position — the workbook's case (Chapter 7, section 7.2). Clearing member A clears for two trading members, PQR and XYZ, in the Nifty May contract.
| TM | Proprietary net | Client 1 net | Client 2 net | Long | Short |
|---|---|---|---|---|---|
| PQR | 5,000 − 3,000 = +2,000 | +1,000 | +2,000 | 5,000 | 0 |
| XYZ | 1,000 − 2,000 = −1,000 | +1,000 | 3,000 − 4,000 = −1,000 | 1,000 | 2,000 |
| A | 6,000 | 2,000 |
XYZ's short 2,000 is its proprietary short 1,000 plus client 2's short 1,000; its long 1,000 is client 1. Clients are not netted against each other.
Deposits for a TCM clearing for four other trading members (illustrative, reading the workbook's norms literally):
Base deposit with clearing corporation = Rs 50 lakh
Additional deposits, 4 TMs × Rs 10 lakh = Rs 40 lakh
Total security deposit = Rs 90 lakh
Minimum net worth = Rs 300 lakh
Minimum liquid net worth = Rs 50 lakh, of which at least 50% cash component
If the same firm cleared only its own deals it would need a net worth of Rs 100 lakh — and could not clear for anyone else.
Why NISM asks about it
Chapter 6, section 6.1, defines the trading cum clearing member among the entities involved in F&O trading. Chapter 7, section 7.1, lists the three kinds of clearing member, their functions, the additional deposit rule and the eligibility norms; section 7.2 computes a clearing member's open position. Chapter 8, sections 8.4 and 8.5, add collateral limits, liquid net worth and the SEBI/exchange split on net worth. Expect "which clearing member can clear for other trading members" and the Rs 300 lakh / 100 lakh / 50 lakh thresholds.
Common exam traps
- TCM clears for itself, its clients and other TMs and custodial participants; SCM cannot clear for other TMs; PCM is not a trading member.
- Rs 300 lakh net worth for a clearing member; Rs 100 lakh for one clearing only its own deals.
- Both TCMs and PCMs bring additional deposits for each TM they clear — not SCMs.
- SEBI prescribes clearing member net worth; exchanges decide trading member net worth.
- Proprietary positions are netted; client positions are summed in a TM's open position.
- Liquid net worth of Rs 50 lakh applies to every clearing member, including self-clearing members.
Where this is taught
- Series IV · Chapter 6: Trading Mechanism in Exchange Traded IRDintroduced here
- Series XVI · Chapter 6: Trading Mechanismintroduced here
- Series VIII · Chapter 6: Trading Mechanismintroduced here
Related terms
- 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.
- 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.
- 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.
- 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.
- Trading memberA member of a stock exchange who trades on behalf of clients or on his own account, under a trading member ID shared by all his registered users — and who must clear through a clearing member.
- 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.
- 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.
- 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.
- 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.
- L. C. Gupta CommitteeThe 24-member SEBI committee under Dr. L. C. Gupta, set up in November 1996, that designed India's regulatory framework for derivatives and recommended they be declared securities.
- Limited trading memberA special category of trading member, offered by some exchanges, who is not a member of the cash market segment and whose net worth requirement is decided by the exchange, not SEBI.
- Trading limitThe exposure ceiling a clearing member sets, through the trading system, for each trading member it clears for — distinct from the market-wide position limit SEBI itself defines.