Let us understand this process of clearing with the specific case of NSE. The NSE Clearing has two categories of clearing members viz. trading clearing members (TCM) and custodians. Trading members can trade on a proprietary basis or trade for their clients, which is what most brokers do. All proprietary trades become the member’s obligation for settlement. Where trading-members trade on behalf of their clients they could trade for normal clients or for clients who would be settling through their custodians. Trades which are for settlement by Custodians are indicated with a Custodian Participant (CP) code and the same is subject to confirmation by the respective Custodian. The custodian is required to confirm settlement of these trades on T + 1 day by the cut-off time 1.00 p.m. Non-confirmation by custodian devolves the trade obligation on the member who had input the trade for the respective client.
A multilateral netting procedure is adapted to determine the net settlement obligations (delivery/receipt positions) of the clearing members. Accordingly, a clearing member would have either pay-in or pay-out obligations for funds and securities separately. In the case of securities in the Trade for Trade – Surveillance segment and auction trades, obligations are determined on a gross basis i.e. every trade results into a deliverable and receivable obligation of funds and securities. Members pay-in and pay-out obligations for funds and securities are determined by 2.30 p.m. on T + 1 day and are downloaded to them so that they can settle their obligations on the settlement day (T+2).