InvestorQ : What is clearing and settlement process and why is it important?
Lavanya Subramanian made post

What is clearing and settlement process and why is it important?

Answer
user profile image
Dawn Cherian answered.
2 years ago


The clearing and settlement on the NSE and the BSE is carried out by the clearing corporation as per the settlement cycles provided in the settlement schedules. The clearing function is the process of determining the obligations of the members of the exchange. This has two aspects:

What members are due to deliver

What members are due to receive on the settlement side

So the buyer of shares has to pay in funds and get deliveries while the seller of shares has to deliver shares and get cash into their accounts. All clearing and settlement is done on the exchanges on a net-obligation basis.

Once the respective obligations are determined based on the clearing, these obligations are discharged through the process called settlement.

The clearing corporations have also devised a fool-proof scheme to deal with exceptional situations like security shortages, bad delivery, company objections, auction settlement etc. The clearing corporation is the counterparty for ever equity and F&O trade on the exchanges and therefore the clearing corporation virtually guarantees that all trades will be honoured. This explains why Indian stock markets have not seen a settlement crisis in the last 16 years despite bouts of extreme volatility.