NISM-Series-VII: Securities Operations and Risk Management · Introduction to the Securities Market

Market Intermediaries and Infrastructure Institutions in the Securities Market

Updated 11 October 2026 · Fact-checked

Infrastructure institutions run the market: stock exchanges provide the trading platform, clearing corporations guarantee and settle trades, and depositories hold securities in electronic form. Intermediaries such as brokers, clearing members and depository participants connect investors to them. To solve questions, match each function to the right entity.

Understand Market Intermediaries and Infrastructure Institutions

A securities trade passes through three stages: trading, clearing and settlement, and holding. Each stage has its own institution. If you remember this, most questions become easy.

The stock exchange provides the platform where buyers and sellers meet and orders are matched. It frames trading rules, admits trading members, monitors trading and does surveillance. It does not hold your shares and does not move money between parties.

The clearing corporation works after the trade. It works out what each member must pay or deliver, nets the obligations, and runs the settlement. It acts as the counterparty to every trade through novation, so each member deals with it and not with the other member. It also collects margins and runs risk management and the settlement guarantee fund.

The depository keeps securities in dematerialised (electronic) form and transfers them by book entry when a trade settles. In India, the two depositories are NSDL and CDSL. Investors do not deal with a depository directly. They open a demat account with a depository participant (DP), which acts as the agent of the depository.

Intermediaries sit between investors and these institutions. A trading member (stock broker) has the right to trade on the exchange. A clearing member is permitted to clear and settle trades with the clearing corporation. A member may be only a trading member, or both, depending on the type of membership. A trading member that is not a clearing member must settle through a clearing member. Other intermediaries include custodians, clearing banks, merchant bankers, registrars and share transfer agents.

Key formulas to remember

Stock exchange function: Stock exchange = trading platform + rules + surveillance; It matches orders. It does not guarantee settlement or hold securities.
Clearing corporation function: Clearing corporation = obligation determination + netting + novation + settlement guarantee + margining; Novation means the clearing corporation becomes the buyer to every seller and the seller to every buyer.
Depository function: Depository = demat holding + book-entry transfer, through depository participants; Investors deal with a DP, not the depository. NSDL and CDSL are the two depositories.
Trading member vs clearing member: Trading member = right to trade; Clearing member = right to clear and settle; A trading member that is not a clearing member settles through a clearing member.
Order of the trade life cycle: Trade (exchange) → Clearing (clearing corporation) → Settlement of funds (clearing bank) and securities (depository); Use this order to place any entity in the right stage.

How to solve Market Intermediaries and Infrastructure Institutions questions

Use this method for any question on who does what in the securities market.

1Read the question and find the activity described: trading, obligation calculation, guarantee, fund movement, or holding of securities.
2Place that activity in the trade life cycle: trade, clearing, settlement, or custody.
3Pick the institution that owns that stage: exchange, clearing corporation, clearing bank or depository.
4Check whether the question asks about an institution or an intermediary. A broker, clearing member and DP are intermediaries.
5Look for words such as only, not, except and primarily. They flip the answer.
6Remove options that give a function to the wrong entity, such as the exchange guaranteeing settlement or the depository matching orders.
7Choose the remaining option and recheck it against the definition.

Quickest way: Verb matching

When to use it: Use it when you have under a minute and the options name different entities.

Match the verb: matches orders = exchange; nets and guarantees = clearing corporation; holds and transfers electronically = depository.
For people questions: trades = trading member; settles with the clearing corporation = clearing member; opens demat accounts = DP.
Cross out any option that mixes two stages.
If two options look right, pick the one that names the entity that directly performs the action.

Common mistakes in Market Intermediaries and Infrastructure Institutions

Saying the stock exchange guarantees settlement of trades.
Students think the exchange is responsible for the whole trade because trades happen on it.
Fix: Link guarantee and novation to the clearing corporation. The exchange only provides the platform and rules.
Saying investors open an account directly with NSDL or CDSL.
Both are well known, so students assume they deal with investors.
Fix: Remember the chain: investor → DP → depository. The DP is the agent of the depository.
Treating trading member and clearing member as the same thing.
Brokers often do both, so the roles blur.
Fix: Trading is the right to trade on the exchange. Clearing is the right to settle with the clearing corporation. Some trading members use another clearing member for settlement.
Thinking the depository holds physical certificates or trades shares.
The word depository sounds like a store for papers.
Fix: A depository holds securities in electronic form and changes ownership by book entry. It does not match trades.
Confusing novation with netting.
Both are done by the clearing corporation during settlement.
Fix: Novation replaces the original counterparty with the clearing corporation. Netting offsets a member's buy and sell obligations to arrive at one figure.

Worked examples

Example 1

Which of the following is the primary function of a clearing corporation? (a) Providing a screen-based trading platform (b) Acting as counterparty to trades through novation and guaranteeing settlement (c) Opening demat accounts for investors (d) Holding securities in electronic form

Show the solution

The activity is after the trade: settlement and guarantee. So the stage is clearing.
Option (a) is the stock exchange's function.
Option (c) is done by a depository participant.
Option (d) is the depository's function.
Option (b) describes novation and settlement guarantee, which belong to the clearing corporation.

Answer: (b)

Example 2

A broker is a trading member of an exchange but is not a clearing member. How are its trades settled?

Show the solution

Identify the roles. The broker has the right to trade but not the right to clear.
Recall that only a clearing member can settle obligations directly with the clearing corporation.
So the broker must attach itself to a clearing member.
The clearing member settles the broker's obligations with the clearing corporation.

Answer: The trades are settled through a clearing member, which settles with the clearing corporation on the broker's behalf.

Exam tips

Questions usually give a function and ask for the entity. Learn each entity's core verbs.
Watch for options that give one entity another's function. These are the standard trap options.
Remember NSDL and CDSL are the depositories, and a DP is an intermediary, not a depository.
Read the words except and not carefully. They are common in this chapter and a wrong answer costs marks under negative marking.
Tie every entity to a stage of the trade life cycle. It lets you answer unfamiliar wording.

Practice questions from Introduction to the Securities Market

Market Intermediaries and Infrastructure Institutions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Market Intermediaries and Infrastructure Institutions: frequently asked questions

What is the difference between a stock exchange, a clearing corporation and a depository?

The exchange provides the trading platform and matches orders. The clearing corporation computes obligations, nets them and guarantees settlement. The depository holds securities electronically and moves them by book entry.

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

A trading member has the right to trade on the exchange. A clearing member is permitted to clear and settle trades with the clearing corporation. A trading member who is not a clearing member settles through one.

Do investors deal directly with a depository?

No. Investors open a demat account with a depository participant, which acts as the depository's agent. The depository maintains the records and processes transfers.

What does novation mean in clearing?

Novation means the clearing corporation steps in between buyer and seller. It becomes the seller to the buyer and the buyer to the seller. This removes counterparty risk between members.