NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management

Clearing Process: formula sheet

Full chapter guide

Key formulas

Sequence of events: Trade → Clearing (confirm, determine obligation, net) → Settlement (pay-in, pay-out); Clearing always comes before settlement. Exam options often reverse them.
Clearing vs settlement: Clearing = determining obligations; Settlement = discharging obligations; Clearing is about calculation and netting. Settlement is about actual movement of funds and securities.
Novation: Buyer ↔ Clearing Corporation ↔ Seller; The clearing corporation becomes the buyer to every seller and the seller to every buyer. This is how it guarantees settlement.
Rolling settlement: Settlement day = T + n working days (n = 1 for the standard equity cycle); T is the trade day. Count working days only, excluding exchange holidays and weekends.
Net obligation: Net obligation = Total buy value − Total sell value (per security or for funds); A positive net buy means the member pays funds. A positive net sell means the member receives funds.
Self clearing member (SCM): SCM = trades for itself + its own clients; no other trading members; It is also a trading member. It does not clear for other trading members.
Trading member-clearing member (TM-CM): TM-CM = own trades + clients' trades + trades of attached trading members; It trades and clears. This is what separates it from a self clearing member.
Professional clearing member (PCM): PCM = clears for others; does not trade on its own account; Often a bank or financial institution. It clears and settles trades for others and does not trade on its own account.
Custodian: Custodian = clearing member that confirms institutional trades; the obligation is then settled through it; Settlement through the custodian happens only after it confirms the trade. It does not trade.
Trading member (TM): TM = trades but does not clear; settles through a clearing member; A plain trading member is not a clearing member and has no direct link to the clearing corporation.
Net securities obligation: Net quantity = Total quantity bought − Total quantity sold (per security, per member, per settlement); A positive result means the member receives securities. A negative result means it must deliver them.
Net funds obligation: Net funds = Total sale value − Total purchase value; A positive result means the member receives funds. A negative result means it must pay funds. Charges are handled separately.
Custodial confirmation outcome: Confirmed → trade goes to the custodian's client. Rejected or not confirmed in time → trade stays with the broker.; The broker remains responsible for settling any trade the custodian does not confirm.
Netting scope: Netting is done per security across all trades of one clearing member in one settlement; Securities are not netted against each other. Only funds are netted into a single amount.
Net securities obligation (per security, per member): Net quantity = Total quantity bought − Total quantity sold; Positive means the member receives securities in pay-out. Negative means the member delivers securities in pay-in.
Net funds obligation (per member): Net funds = Total sale value − Total purchase value; Positive means the member receives funds in pay-out. Negative means the member pays funds in pay-in.
Role of clearing corporation: Buyer to every seller, seller to every buyer (novation); Netting is done against the clearing corporation, not against individual counterparties.
Pay-in and pay-out sequence: Net buyer: pays funds, receives securities. Net seller: delivers securities, receives funds.; Pay-in is to the clearing corporation. Pay-out is from the clearing corporation.
Fund settlement flow: Clearing member's clearing account ⇄ Clearing corporation's account (via clearing bank); Debit on pay-in for net payable; credit on pay-out for net receivable.
Securities settlement flow: Seller's demat → Seller-side member's pool account → Clearing corporation's pool account → Buyer-side member's pool account → Buyer's demat; Depository executes the transfers on instructions of the clearing corporation. Exact account naming can vary; remember the pool account is the intermediate point.
Net obligation: Net funds obligation = Total sell value − Total buy value (across all the member's trades in the settlement); This is multilateral netting of the member's funds obligation: one net figure across all trades and securities in the settlement. Positive means the member receives funds; negative means it must pay in. It is separate from the securities obligation, which is netted security by security.
Who holds what: Clearing bank → funds; Depository → securities; Clearing corporation → instructs both; Use this to eliminate wrong options quickly.
Novation: Buyer ↔ Clearing Corporation ↔ Seller; After novation, the clearing corporation is the counterparty to both sides and guarantees settlement.
Order of use of resources on default: Defaulter's resources → Clearing corporation's own contribution → Non-defaulting members' contributions; Defaulter's money is always used first. Non-defaulting members are not used before the defaulter's own assets. Check the workbook for the full layered order.
Purpose of margin: Margin ≥ potential loss on closing out a position; Margin is a safeguard against likely loss, not a payment of the trade value.
Segment-wise guarantee fund: One settlement guarantee fund per segment; A default in one segment is dealt with from that segment's fund.

Quick revision

Clearing determines obligations; settlement is the actual exchange of securities and funds.
The clearing corporation confirms trades and works out each member's obligation.
Multilateral netting offsets a member's buys and sells so that one net obligation remains per security.
Pay-in is when members deliver securities or funds to the clearing corporation.
Pay-out is when the clearing corporation gives securities or funds to members.
Pay-in comes before pay-out.
Clearing banks handle the funds side of settlement; depositories handle the securities side.
Clearing members are the entities permitted to clear and settle trades with the clearing corporation.
Clearing members may be different from trading members, so check the type in the question.
Risk controls in clearing protect the system against a member's default.
Check whether a question asks for a securities obligation or a funds obligation before choosing.

Common mistakes

Treating clearing and settlement as the same thing. Fix: Remember that clearing determines who owes what, and settlement is when it is actually paid or delivered.
Saying settlement happens on the trade day. Fix: Trade day is T. Settlement comes later under the rolling cycle. Check the prescribed cycle for the instrument.
Saying a trading member can settle directly with the clearing corporation. Fix: Remember that only a clearing member deals with the clearing corporation. A plain trading member needs a clearing member.
Treating a professional clearing member as a trading member. Fix: A PCM only clears for others. It does not trade on its own account.
Thinking the custodian executes the trade. Fix: The broker trades. The custodian only confirms and then settles for the institution.
Netting one security against a different security. Fix: Net quantities per security. Only the money side is netted into a single amount.
Netting securities across different scrips Fix: Net each security separately. Only funds are combined into one figure for the member.
Confusing pay-in with pay-out Fix: Pay-in is into the clearing corporation. Pay-out is out of it to the member.
Saying the depository settles funds. Fix: Depository handles securities only. Funds go through clearing banks.
Treating the clearing account as a client's investment account. Fix: A clearing account is the member's account with a clearing bank used for settlement of funds with the clearing corporation.

Exam tips

Link each word to its stage: confirmation and netting for clearing, pay-in and pay-out for settlement.
Read the question for the phrase 'working days'. Holidays change the settlement date.
If an option says the buyer and seller remain counterparties to each other after clearing, treat it as a trap and recall novation.
Study this topic together with the clearing corporation's risk management, since questions often combine the two.
Build a one-line role for each type and recite it before the test.
The trap is usually swapping SCM and TM-CM. Check whether other brokers are attached.
Questions often use 'cannot trade' as the clue for a PCM.
Negative marking is 25% of the marks for the question, so skip a question only if you cannot remove two options.