There are three types of instruments that are traded on Major Stock Exchanges(NSE,BSE) namely equities, derivatives and debt instruments.The transactions in secondary market pass through three distinct phases, viz., trading, clearing and settlement.
While the stock exchanges provide the platform for trading other entities, like the clearing corporation, clearing members, custodians, clearing banks, depositories are involved in the process of clearing.
The role of each of these entities will be further explained:
· The Stock Exchanges provide the platform for trading
· Presently in India, stock exchanges follow T+2 days settlement cycle. Under this system, trading happens on every business day, excluding Saturday, Sunday and exchange notified holidays.
· The trading schedule is between 9:00 a.m. in the morning to 3:30 p.m. in the evening. During this period, shares of the companies listed on a particular stock exchange can be bought and sold.
The SEBI has made it mandatory that only brokers and sub-brokers registered with it can buy and sell shares in the stock exchange. A person desirous of buying or selling shares on the stock market needs to get himself registered with one of these brokers / sub-brokers.
· After client gets registered with broker he can trade by many ways
o Online Trading (Through terminal)
o Phone Trading
o Mobile Trading
Apart from the purchase price of security, a client is also supposed to pay brokerage, stamp duty and securities transaction tax.
Ø The clearing corporation is responsible for post-trade activities such as risk management and clearing and settlement of trades executed on a stock exchange.
Ø The first clearing corporation to be established in the country and also the first clearing corporation in the country to introduce settlement guarantee is the National Securities Clearing Corporation Ltd. (NSCCL), a wholly owned subsidiary of NSE.
Ø Clearing Members are responsible for settling their obligations as determined by the clearing corporation. They do so by making available funds and/or securities in the designated accounts with clearing bank/depositories on the date of settlement.
They settle trades on behalf of trading members, when a particular trade is assigned to them for settlement. The custodian is required to confirm whether he is going to settle that trade or not. If he confirms to settle that trade, then clearing corporation assigns that particular obligation to him.
Ø As on date, there are 13 custodians empanelled with NSCCL
Ø HDFC Bank Ltd., ICICI Bank Ltd., Standard Chartered Bank Ltd., Axis Bank Ltd and many others
Clearing banks are a key link between the clearing members and Clearing Corporation to effect settlement of funds. Every clearing member is required to open a dedicated clearing account with one of the designated clearing banks. Based on the clearing member’s obligation as determined through clearing, the clearing member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out.
viz., Axis Bank Ltd, Bank of India Ltd., Canara Bank Ltd and many others.
DEPOSITORY: Depository holds securities in dematerialized form for the investors in their beneficiary account Each clearing member is required to maintain a clearing pool account with the depositories. He is required to make available the required securities in the designated account on settlement day. The depository runs an electronic file to transfer the securities from accounts of the custodians/clearing member to that of NSCCL and visa-versa
The two depositories in India are
The National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL).
TRADING and SETTLEMENT
1. Investor places order (TT, Moblie).
2. Broker house validates the orders and routes them to the exchange.
3. Order matching at the exchange.
4. Trade confirmation to the investors through the brokers.
5. Trade details are send to Clearing Corporation from the Exchange.
6. Clearing Corporation notifies the trade details to clearing members/custodian who confirm back. based on the confirmation, Clearing Corporation determines obligations.
7. Clearing Corporation gives instructions to clearing Banks to make funds available in pay in time.
8. Clearing Corporations gives instructions to depositories to make securities available in pay in time.
- Pay in of securities: Clearing Corporation advices depository to debit pool account of custodian/clearing houses and credit its (clearing corporation’s) account and depository does the same.
- Pay in of funds: Clearing Corporation advices banks to debit account of custodians/clearing houses and credit its account and banks do the same.
- Pay out of Securities: Clearing Corporation advices depository to credit account of custodians/clearing house and debit its account and depository does the same.
- Pay out of Funds: Clearing Corporation advices the banks to credit account of custodians/clearing houses and debit its account and depository does the same.
Ø On account of non delivery of securities by trading member on pay in day.
Ø The securities are put up for auction by exchange after settlement day.
Ø Pay in day is the day in which trading members are required to provide securities and money to exchange.
Ø On pay out exchange will transfer fund and securities to trading members .
Ø As trading member has paid fund for securities exchange will make arrangement of securities from auction market.
Ø Auction markets opens on every working day on 12noon-2:00 pm.
Ø During this time exchange purchases share from the market .
Ø The participants who have securities give their bids
Ø Out of all bids exchange selects the best bid.
Ø Participants have to deliver shares immediately.
Ø Then exchange will then give these share to trading member by advising depository to debit trading members a/c.
Ø After that participants will buy share from market at lesser rate and the difference is his profit.
Ø If participants fails to deliver the shares he has to pay an interest of18%
Ø If this happens then exchange will return fund to buyer.
Ø If short delivery occurs in trade to trade securities then buyer of the security is refunded.
Ø Mostly sellers of security faces lose in an auction process.
Ø But sometimes sellers can earn profit out of it.
Ø Participants give their bid as per market condition.
Ø If market on a day is down than share will be bid at lower price and difference will be credited to sellers a/c.
Ø However to avoid such practices some broker do not give credit to seller (if profit made in auction).