NISM-Series-VII: Securities Operations and Risk Management · Clearing Process

Clearing Members and Their Types in Securities Markets

Updated 11 October 2026 · Fact-checked

A clearing member is a member of the clearing corporation that takes responsibility for settling trades, for itself or for others. The main types are self clearing members, trading member-clearing members, professional clearing members and custodians, who confirm institutional trades before settlement. To solve questions, identify who trades and who clears for others.

Understand Clearing Members and Their Types

Trades are executed on the stock exchange, but they are settled through the clearing corporation. Only a clearing member can deal directly with the clearing corporation. So every trade must end up with a clearing member who takes responsibility for settling it.

A trading member (broker) has the right to trade on the exchange. A trading member is not automatically a clearing member. If it is not, it must attach itself to a clearing member who settles its trades.

There are four categories you must know. A self clearing member clears and settles only its own trades and its clients' trades. It is also a trading member. A trading member-clearing member (TM-CM) clears its own trades, its clients' trades and the trades of other trading members who are attached to it. A professional clearing member (PCM) clears and settles trades for others but does not trade itself; it is usually a bank or a financial institution. A custodian is a clearing member that confirms the trades of institutional clients, such as FPIs and mutual funds. Only after the custodian confirms the trade is the obligation settled through it. The custodian does not trade.

The key link is responsibility. The clearing member carries the settlement obligation and the risk to the clearing corporation. That is why the clearing corporation sets eligibility rules, such as net worth and deposits, for clearing members. Exact net worth figures and deposit amounts are set by SEBI and the clearing corporation and change over time, so learn the roles first and check the workbook for figures.

Key formulas to remember

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.

How to solve Clearing Members and Their Types questions

Use this method for any question on types of clearing members. It works for definition, comparison and scenario questions.

1Read the question and find the entity: a broker, a bank, an institution or a custodian.
2Ask: does it trade on the exchange? If no, it is a PCM or a custodian. Separate the two: a PCM clears and settles trades for brokers, while a custodian confirms institutional trades.
3If it does trade, ask: does it clear trades of other trading members? If yes, it is a TM-CM.
4If it trades and clears only for itself and its clients, it is a self clearing member. A trading member that does not clear at all is a plain trading member, not a clearing member.
5If the client is an institution and settlement follows trade confirmation, think custodian.
6Check each option against these tests and remove the ones that break a role.
7Watch the words 'only', 'not' and 'except' before you choose.

Quickest way: Two-question filter

When to use it: Use it when you have under a minute and the options look alike.

Question 1: does it trade? Yes points to SCM or TM-CM. No points to PCM or custodian.
Question 2 applies only if it trades: does it clear for other brokers? Yes points to TM-CM. No points to SCM. If it does not trade, separate the two: a PCM clears for brokers, a custodian confirms institutional trades. A trading member that is not a clearing member is never the answer to a 'which clearing member' question. It only appears as a distractor.
If the clients are institutions and the trade is confirmed before settlement, pick custodian.
Pick the one option that fits both answers.

Common mistakes in Clearing Members and Their Types

Saying a trading member can settle directly with the clearing corporation.
Students mix up trading rights with clearing rights.
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.
The word 'member' suggests exchange trading.
Fix: A PCM only clears for others. It does not trade on its own account.
Thinking a self clearing member clears for other brokers.
Students confuse it with a TM-CM.
Fix: 'Self' means own trades and own clients only. Clearing for other trading members is the TM-CM or PCM role.
Calling a custodian a trader for institutions, or saying it simply settles trades itself.
Custodians appear in trade flows, so they seem to trade or to do the settling.
Fix: A custodian is a clearing member that confirms institutional trades. The obligation is settled through it only after confirmation. The broker executes the trade.
Memorising net worth or deposit figures without checking them.
Students want one fixed number for eligibility.
Fix: Know that eligibility rests on net worth and deposits, but take exact figures from the current workbook. Do not guess them.

Worked examples

Example 1

Which type of clearing member clears and settles trades for others but does not trade on its own account? (a) Self clearing member (b) Trading member-clearing member (c) Professional clearing member (d) A trading member that is not a clearing member

Show the solution

Apply question 1: does it trade? The member does not trade on its own account.
That rules out the self clearing member and the TM-CM, which both trade.
A trading member that is not a clearing member trades and does not clear, so it is also out.
The member that only clears for others is the professional clearing member.

Answer: (c) Professional clearing member

Example 2

A broker trades for itself and its clients and also settles trades of two smaller brokers attached to it. What type of clearing member is it? (a) Self clearing member (b) Trading member-clearing member (c) Professional clearing member (d) Custodian

Show the solution

Does it trade? Yes. So the PCM and custodian options are out.
Does it clear for other trading members? Yes, two smaller brokers.
A self clearing member does not clear for other brokers, so (a) fails.
Trading plus clearing for attached brokers is the TM-CM.

Answer: (b) Trading member-clearing member

Exam tips

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.
Link this topic to settlement flow. Custodian questions often sit with institutional trades.

Practice questions from Clearing Process

Clearing Members and Their Types: frequently asked questions

What is a self clearing member?

A self clearing member is a clearing member that clears and settles only its own trades and its clients' trades. It does not clear for other trading members.

What is the difference between a professional clearing member and a trading member?

A trading member trades on the exchange. A professional clearing member does not trade on its own account and only clears and settles trades for others. Banks and financial institutions usually act as PCMs.

Can a trading member also be a clearing member?

Yes. A member that trades and clears is a self clearing member or a trading member-clearing member. A trading member that is not a clearing member must attach itself to one.

What does a custodian do in clearing?

A custodian is a clearing member that confirms the trades of institutional clients such as FPIs and mutual funds. Only after the custodian confirms the trade is the obligation settled through it.