NISM-Series-VII: Securities Operations and Risk Management · Clearing Process
Clearing Banks, Depositories and Fund Settlement in NISM Securities Operations
Updated 11 October 2026 · Fact-checked
Settlement has two legs. Clearing banks move funds between the clearing corporation's account and each clearing member's designated clearing account. Depositories move securities between demat accounts, using the clearing corporation's pool account. Funds and securities flow in (pay-in) and out (pay-out) on the settlement day. Questions test who holds which account.
Understand Clearing Banks, Depositories and Fund Settlement
A trade on the exchange is only a promise. Settlement turns it into real money and real securities changing hands. Two infrastructure institutions make this possible: clearing banks for money and depositories for securities.
The clearing corporation sits in the middle. It works out what each clearing member must pay or deliver. It does not hold money or shares in its own office. It uses accounts with clearing banks and depositories.
For funds, each clearing member keeps a clearing account with a clearing bank approved by the clearing corporation. On pay-in day, the member must have enough balance in this account. The clearing corporation instructs the clearing bank to debit the member and credit the clearing corporation's account. On pay-out day, the reverse happens: money due to the member is credited to its clearing account.
For securities, all shares are held in dematerialised form with a depository (NSDL or CDSL). A member who must deliver shares has them moved from the seller's demat account to the seller-side member's pool account, and then delivers them into the clearing corporation's pool account at the depository. On pay-out, the clearing corporation moves shares from its pool account to the buyer-side member's pool account, and the member then credits the buyer's demat account. The depository executes each transfer on instruction.
The key idea: money moves through bank accounts, shares move through demat accounts, and the clearing corporation controls both legs. The broker's clearing account is for settlement of funds, not for holding client investments.
Key formulas to remember
- 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.
How to solve Clearing Banks, Depositories and Fund Settlement questions
Use this method for any question on clearing banks, depositories or fund settlement.
- 1Identify whether the question is about funds, securities, or both.
- 2If funds, think clearing bank and clearing account. If securities, think depository and pool account.
- 3Find the direction: pay-in means member to clearing corporation; pay-out means clearing corporation to member.
- 4Identify who gives the instruction: the clearing corporation instructs the bank and the depository.
- 5Check the role of the member: it must keep funds in its clearing account and securities available in its demat or pool account before pay-in.
- 6Remove options that mix up roles, such as a depository moving cash or a bank moving shares.
- 7Pick the option that matches the sequence and the account named.
Quickest way: Money-or-Share Test
When to use it: Use when an MCQ asks which institution or account performs a settlement step.
- Ask: is the item money or a security?
- Money: clearing bank and clearing account. Security: depository and pool account.
- Ask: pay-in or pay-out? Pay-in is to the clearing corporation; pay-out is from it.
- Reject any option where a bank handles securities or a depository handles cash.
Common mistakes in Clearing Banks, Depositories and Fund Settlement
Saying the depository settles funds.
Both clearing banks and depositories are called settlement institutions.
Fix: Depository handles securities only. Funds go through clearing banks.
Treating the clearing account as a client's investment account.
The word account sounds like a client account.
Fix: A clearing account is the member's account with a clearing bank used for settlement of funds with the clearing corporation.
Confusing pay-in with pay-out.
Direction is judged from the wrong party's view.
Fix: Always judge from the clearing member: pay-in is into the clearing corporation; pay-out is out to the member.
Believing the clearing corporation delivers shares from its own holdings.
It is in the middle, so it looks like a counterparty with stock.
Fix: It uses its pool account at the depository to route shares between members. It acts as the central counterparty by novation.
Ignoring that only approved clearing banks can be used.
Students assume any bank account works.
Fix: Members must use clearing banks approved by the clearing corporation for settlement.
Worked examples
Example 1
A clearing member has bought shares worth ₹8,00,000 and sold shares worth ₹5,50,000 in a settlement. What is the fund obligation and through which account is it settled?
Show the solution
- Net obligation = sell value − buy value.
- = ₹5,50,000 − ₹8,00,000 = −₹2,50,000.
- A negative figure means the member is a net payer.
- The member must keep ₹2,50,000 in its clearing account with the clearing bank by pay-in time.
- The clearing bank debits the clearing account and credits the clearing corporation on instruction.
Answer: The member pays in a net ₹2,50,000 through its clearing account at the clearing bank.
Example 2
Which institution executes the transfer of securities to the clearing corporation on pay-in day, and which account receives them?
A. Clearing bank; clearing account
B. Depository; pool account of the clearing corporation
C. Stock exchange; trading account
D. Custodian; savings account
Show the solution
- Securities are involved, so a depository is needed, not a bank.
- Eliminate A, because clearing banks and clearing accounts relate to funds.
- Eliminate C, because the stock exchange does not execute securities transfers (it only matches trades) and a trading account is not the settlement account.
- Eliminate D, because a custodian is not the institution that executes the transfer to the clearing corporation (the depository does) and a savings account is not a pool account.
- Securities are transferred into the clearing corporation's pool account at the depository.
Answer: B. Depository; pool account of the clearing corporation.
Exam tips
- Match every option to money or securities first; this removes two options in seconds.
- Read the direction word carefully: pay-in or pay-out.
- Remember that the clearing corporation instructs; banks and depositories execute.
- Watch for options that give a clearing account an investment purpose; it is a settlement account only.
- NISM-Series-VII has negative marking of 25% of the marks assigned to a question, so wrong answers are penalised. Unattempted questions carry no penalty, so answer only when you can place the role with reasonable confidence.
Practice questions from Clearing Process
- In the clearing process of an Indian stock exchange, which entity interposes itself as the legal counterparty to every trade, becoming the b…
- A clearing member has a net delivery obligation in a security but fails to deliver on the pay-in day. Under the usual exchange process for s…
- A clearing member fails to deliver 500 shares of a company at pay-in, and the shares are not available for the buyer. Which course is follow…
- In the clearing process of a stock exchange in India, which entity interposes itself between the buying and selling clearing members and bec…
- A clearing member fails to meet its pay-in obligation of funds on settlement day. Which sequence best reflects the typical action of the cle…
Clearing Banks, Depositories and Fund Settlement in other exams
The same ground in other exams, if you are preparing for more than one or want another angle on it.
Clearing Banks, Depositories and Fund Settlement: frequently asked questions
What is the role of a clearing bank in settlement?
A clearing bank holds the clearing accounts of clearing members and the clearing corporation. It debits or credits these accounts on the clearing corporation's instructions for pay-in and pay-out of funds.
What does a depository do in pay-in of securities?
It moves securities in electronic form on instruction as part of the settlement process. They go from the client's demat account to the member's pool account, and then from the member's pool account to the clearing corporation's pool account.
What is a broker's clearing account?
It is the account a clearing member keeps with an approved clearing bank for settlement of funds with the clearing corporation. It is not used to hold client investments.
Does the clearing corporation hold shares itself?
It does not keep shares in a physical form. It uses its pool account at the depository to route securities between members during settlement.