T+1 Settlement Cycle: Clearing Process in Indian Capital Markets
Introduction to Clearing and Settlement
Clearing and settlement is the backbone of the securities market. It ensures that every trade executed on the stock exchange is completed safely and efficiently – the buyer receives the securities and the seller receives the funds. In India, the equity market follows a T+1 rolling settlement cycle, meaning settlement takes place one working day after the trade date.
The 7-Step Settlement Cycle
Step 1: Trade Execution (T Day)
The process begins when an investor places a buy or sell order through a broker. The broker routes the order to the stock exchange (NSE/BSE). The exchange’s order-matching system matches buy and sell orders on a price–time priority basis. Once matched, the trade is executed, and both the buyer and the seller receive trade confirmations.
Step 2: Trade Recording and Reporting
After the market closes, the stock exchange records all matched trades and prepares a trade file. This information is sent to the clearing corporation (NSCCL for NSE / ICCL for BSE). Brokers and custodians also receive trade confirmation and obligation details.
Step 3: Clearing and Novation
The clearing corporation acts as a Central Counterparty (CCP) and performs novation, becoming the buyer to every seller and the seller to every buyer. This ensures settlement even if one party defaults. It determines the net obligations of each member through a process called netting. Obligation reports specifying funds and securities to be delivered or received are issued by early morning of T+1.
Step 4: Risk Management
To prevent default risk, the clearing corporation collects various margins such as Value at Risk (VaR), Extreme Loss Margin (ELM), and Mark-to-Market (MTM). It also maintains a Settlement Guarantee Fund (SGF) as a safety net to ensure smooth settlement even in case of broker default.
Step 5: Pay-in Process (T+1 Morning)
On the morning of T+1, buying brokers ensure sufficient funds in their clearing bank accounts, which are debited and transferred to the clearing corporation. Selling brokers deliver securities electronically through the depositories (NSDL/CDSL). Depository Participants (DPs) facilitate the electronic movement of securities from the broker’s pool account to the clearing corporation’s settlement account.
Step 6: Pay-out Process (T+1 Afternoon)
Once pay-in is confirmed, the clearing corporation transfers securities to the buying brokers’ accounts and funds to the selling brokers’ accounts. Brokers then transfer the securities and funds to their clients (investors). Depositories ensure smooth credit of securities to investors’ demat accounts, while clearing banks credit funds to the sellers’ bank accounts.
Step 7: Settlement Finality
When both funds and securities have been transferred successfully, the settlement is considered legally and operationally final. The buyer receives securities in their demat account and the seller receives funds in their bank account, completing the trade cycle.
Roles of Major Institutions in Settlement
- Stock Exchange (NSE/BSE): Provides the trading platform and matches buy-sell orders.
- Clearing Corporation (NSCCL/ICCL): Acts as Central Counterparty, undertakes novation, manages risk, and guarantees settlement.
- Depositories (NSDL/CDSL): Handle electronic transfer of securities.
- Clearing Banks: Manage funds movement during pay-in and pay-out.
- Brokers/Custodians: Intermediaries between investors and market infrastructure.
- Investors: Final recipients of securities or funds.
The Capital Market Settlement Flow
The typical flow of the settlement process involves the following sequence:
- Investor
- Broker (Trading Member)
- Stock Exchange (NSE/BSE)
- Clearing Corporation (NSCCL/ICCL)
- Clearing Bank / Depository (NSDL/CDSL)
- Broker (Final Settlement)
- Investor