INTRODUCTION
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.
CLEARING
CORPORATION
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.
CLEARING MEMBERS
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.
CUSTODIANS
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
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.
AUCTION
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.
PROFIT/LOSS
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).