Settlement Process: formula sheet

Key formulas

Rolling settlement date (equity cash)

Settlement day = T + 1 working day

T is the trading day. Count only working days, skipping weekends and exchange holidays.

Account period vs rolling

Account period: many days of trades, one settlement date. Rolling: each trading day has its own settlement date.

Rolling settlement has no carry-forward within a period.

Pay-in

Pay-in = sellers' members deliver securities and buyers' members pay funds to the clearing corporation

Members pay in to the clearing corporation, not directly to the other party in the trade.

Pay-out

Pay-out = clearing corporation gives securities to buyers' members and funds to sellers' members

Pay-out is made by the clearing corporation to members on a net basis, not by the counterparty.

Net obligation

Funds obligation = total buy value − total sell value, across all securities for the member (positive = pay, negative = receive). Securities obligation = quantity bought − quantity sold, calculated for each security separately.

Settlement is on a net basis for each member, not trade by trade. Funds are netted across all securities, while securities are netted security by security.

Novation

Clearing corporation = buyer to every seller + seller to every buyer

This is how the clearing corporation takes counterparty risk and guarantees settlement.

Trading member vs clearing member

Trading member = right to trade on exchange; Clearing member = right to clear and settle with clearing corporation

A trading-cum-clearing member has both rights.

Types of clearing member

Trading-cum-clearing (TCM) = own + clients + other trading members | Self-clearing (SCM) = own + clients only | Professional clearing (PCM) = others only

TCM also clears for other trading members. SCM does not. PCM clears for others and does not trade on its own.

Agency to task

Funds: clearing bank | Securities: depository | Institutional trades: custodian | Netting and guarantee: clearing corporation

Use this match to eliminate wrong options.

Net securities obligation

Net securities = Quantity bought − Quantity sold (per security, per member)

A positive result means pay-out of securities. A negative result means pay-in of securities.

Net funds obligation

Net funds = Value of sales − Value of purchases

A positive result means funds pay-out to the member. A negative result means funds pay-in by the member.

Direction rule

Seller: delivers securities, receives funds. Buyer: pays funds, receives securities.

Net over all trades, not trade by trade.

Pay-in and pay-out flow

Member → Clearing corporation (pay-in) → Member (pay-out)

Securities flow through depositories. Funds flow through clearing banks.

Early pay-in

Early pay-in = delivery of securities before the scheduled pay-in time

Used to avoid shortages and to get earlier credit. Applies to securities, not a change in the settlement day.

Sequence of a custodial trade

Trade execution with custodian code → Custodian confirms on clearing corporation's system by cut-off → Netting/obligation → Pay-in and pay-out

Settlement responsibility shifts to the custodian only after it confirms the trade.

Who settles

Confirmed by custodian → custodian settles; not confirmed, rejected or late → trading member settles

The trading member remains liable for a trade the custodian does not confirm.

Roles

Trading member = executes and flags the trade as custodial; Custodian = confirms and settles; Clearing corporation = guarantees and nets

Do not swap the trading member's and the custodian's actions in options.

Close-out price

Close-out price = higher of (highest price in the normal market from the trade day to the auction day) and (official closing price on the auction day × 1.20)

This is the exchange rule for close-out. The 20% margin above the closing price is the part students forget.

Seller's loss in an auction

Loss = (Auction price − Original sale price) × Short quantity, if auction price is higher

The buyer pays only the original trade price. The seller bears any excess of the auction price over it. Penalties and charges come on top. If the auction price is lower, the seller does not receive the difference.

Seller's loss in a close-out

Difference = (Close-out price − Original sale price) × Short quantity

This ignores penalties and charges. The buyer is compensated at the close-out price.

Order of action

Shortage at pay-in → Auction → Close-out if the auction gets no seller

Auction comes first. Close-out is the fallback.

Guarantee through novation

Clearing corporation becomes buyer to every seller and seller to every buyer

This is why a counterparty default does not stop settlement for the other side.

Default handling order (principle)

Defaulter's own resources → SGF and other waterfall layers as per the clearing corporation's rules

Learn the principle. Do not quote layer sizes unless your workbook gives them.

SGF vs IPF

SGF: clearing corporation, ensures settlement. IPF: stock exchange, compensates investors

A common trap pairs the wrong fund with the wrong institution.

Segment-wise fund

One SGF per segment at a clearing corporation

Cash, derivatives and other segments have separate funds and risk.

Trade-for-Trade settlement

No netting: each trade settles separately; buy ⇒ take delivery, sell ⇒ give delivery

Intraday square-off is not allowed in this segment.

Z group

Z group = non-compliant companies, settled trade-for-trade

Linked to non-compliance with listing requirements.

Ex-date under T+1

Ex-date = Record date (when the cycle is T+1 and both are trading days)

Buy on or after the ex-date: no entitlement. Buy before: entitled.

Entitlement test

Entitled if shares are in your demat account at the end of the record date

Holding is judged on the record date, not the announcement date.

Quick revision

• Settlement is the delivery of securities against payment after a trade is executed.
• Equity cash market trades settle on a rolling basis, counted from trade day T.
• The clearing corporation determines obligations and acts as the counterparty guaranteeing settlement.
• Clearing members settle obligations with the clearing corporation, not directly with each other.
• Pay-in is when members give funds and securities to the clearing system; pay-out is when they receive them.
• Depositories hold securities in demat form and move them between accounts for settlement.
• Clearing banks handle the movement of funds for clearing members.
• Institutional trades are confirmed by the custodian before settlement.
• A shortage in delivery leads to an auction or close-out under exchange rules.
• The Settlement Guarantee Fund helps complete settlement if a member defaults.
• Corporate action entitlements depend on the record date, not the trade date alone.
• Always verify exact timings and percentages in the current workbook.

Common mistakes

• Counting Saturdays, Sundays or holidays as settlement days. Fix: Always count only days when the exchange and banks are open for settlement.
• Confusing rolling settlement with account period settlement. Fix: Remember: rolling gives each trade day its own settlement date; account period bunches trades into one date.
• Saying the exchange guarantees settlement. Fix: The clearing corporation guarantees settlement through novation and the settlement guarantee fund.
• Treating trading members and clearing members as the same. Fix: Trading is a right on the exchange. Clearing is a right with the clearing corporation. Some firms hold only one.
• Netting different securities against each other. Fix: Net each security separately. Only funds are netted into one amount.
• Reversing pay-in and pay-out. Fix: Pay-in is always towards the clearing corporation. Pay-out is always from it.
• Saying the broker confirms the trade to the custodian. Fix: The broker only executes the trade and flags it as custodial. The custodian confirms the trade on the clearing corporation's system and thereby takes on settlement responsibility. Some texts call this acceptance affirmation; both terms refer to the custodian's acceptance of the trade.
• Thinking the custodian is always liable after execution. Fix: Liability shifts only after the custodian confirms. Otherwise the trading member settles.
• Choosing the lower of the two close-out price candidates Fix: Remember the close-out price is meant to deter default. Always take the higher value.
• Applying 20% below the closing price instead of above Fix: Close-out uses 20% above the official closing price on the auction day.

Exam tips

• Questions often test the definition of rolling settlement versus account period. Learn one clear line for each.
• When a date question includes a holiday, count only working days. This is the most common trap.
• Read whether the question asks for pay-in or pay-out. Wrong-direction options are common distractors.
• Remember that Series VII has negative marking of 25% of the marks assigned to a question. Skip only if you cannot narrow to two options.
• Expect who-does-what questions. Learn one task per agency and keep it exact.
• Know the three clearing member types and the key word for each: both, own and clients, others only.
• Watch for options that swap the roles of depository and clearing bank.
• Series VII has 25% negative marking, so guess only when you can eliminate at least one option; otherwise consider skipping.