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NISM-Series-VII: Securities Operations and Risk Management · Market Participants in the Securities Market

Clearing Corporation and Clearing Members for NISM Series VII

Updated 11 October 2026 · Fact-checked

A clearing corporation is the entity that clears and settles trades done on an exchange. Through novation it becomes the buyer to every seller and the seller to every buyer, acting as central counterparty. It guarantees settlement, manages risk and runs the settlement guarantee fund. Clearing members settle trades with it.

Understand Clearing Corporation and Clearing Members

When you trade on an exchange, you do not know who is on the other side. If that person fails to pay or deliver, you could lose. The clearing corporation exists to remove this worry. It is a separate entity that handles the clearing and settlement of trades done on the exchange.

The key idea is novation. After a trade is matched, the original contract between buyer and seller is replaced by two new contracts. The clearing corporation becomes the central counterparty (CCP). It is the seller to the buyer and the buyer to the seller. So each member's obligation is towards the clearing corporation, not towards the other member. This is what is meant by guaranteed settlement.

A guarantee is only as good as the risk controls behind it. So the clearing corporation collects margins from members, sets exposure and position limits, monitors positions, and keeps a Settlement Guarantee Fund (SGF) (also called the Core SGF) built from contributions of the clearing corporation and members. If a member defaults, the clearing corporation uses the defaulter's margins and deposits first, and then the resources of the fund in a defined order, so that the settlement of other members is not disturbed.

Only clearing members deal directly with the clearing corporation. They are responsible for settling obligations, both their own trades and the trades of those who clear through them. A clearing member must meet the net worth, deposit and other eligibility norms set by the clearing corporation and SEBI. Trading members who are not clearing members must clear through a clearing member.

For the exam, remember the chain: trade, novation, netting, margin collection, pay-in and pay-out through clearing banks and depositories, and default handling through the SGF. Questions test who does what, and what the CCP guarantees.

Key formulas to remember

Novation
Original contract (Buyer ↔ Seller) → Buyer ↔ CCP and CCP ↔ Seller
The CCP becomes the buyer to every seller and the seller to every buyer. This is the basis of the settlement guarantee.
Central counterparty role
CCP = guarantor of settlement + risk manager + settlement agent
Guarantee covers settlement of trades accepted for clearing; it does not guarantee that a trade will be profitable.
Default waterfall (order of use)
Defaulter's margins and deposits → defaulter's contribution to SGF → other resources of the clearing corporation as per its rules → non-defaulting members' contributions
The defaulter's own resources are used first. Check the exact order in your workbook wording for the option given.
Clearing member types
Self-clearing member | Trading-cum-clearing member | Professional clearing member
Self-clearing clears only its own trades and its clients' trades. Trading-cum-clearing also clears for other trading members. Professional clearing members clear for others and do not trade themselves.

How to solve Clearing Corporation and Clearing Members questions

Most questions on this topic ask who performs a function, what a term means, or what happens on default. Use this method.

  1. 1Read the question and identify the entity: clearing corporation, clearing member, clearing bank, depository or exchange.
  2. 2Spot the keyword: novation, guarantee, netting, margin, SGF, default, or member type.
  3. 3Recall the one-line role of that entity. Clearing corporation guarantees and manages risk. Clearing members settle obligations. Clearing banks move funds. Depositories move securities.
  4. 4Eliminate options that give the role to the wrong entity, such as the exchange guaranteeing settlement.
  5. 5Watch absolute words like always, only and all. Reject options that overstate the guarantee.
  6. 6For default questions, apply the order: defaulter's resources first, then fund resources.
  7. 7Choose the option that matches the exact definition and recheck the question for NOT or EXCEPT.

Quickest way: Entity-to-role matching

When to use it: Use it for one-line MCQs when time is short.

  1. Guarantee or counterparty: pick the clearing corporation.
  2. Settling obligations with the clearing corporation: pick clearing members.
  3. Funds movement: clearing bank. Securities movement: depository.
  4. Contract replaced by two new contracts: novation.
  5. Default loss: defaulter's margins first, then the SGF.

Common mistakes in Clearing Corporation and Clearing Members

  • Saying the stock exchange guarantees the trade.

    Trading happens on the exchange, so students link the guarantee to it.

    Fix: The exchange matches orders. The clearing corporation guarantees settlement as central counterparty.

  • Confusing novation with netting.

    Both are clearing steps and both reduce obligations in some sense.

    Fix: Novation replaces the contract with two contracts with the CCP. Netting offsets a member's buy and sell obligations into a net figure.

  • Thinking the guarantee protects against price loss.

    The word guarantee sounds broad.

    Fix: It guarantees settlement of the trade, meaning delivery and payment. It does not protect against market price movements.

  • Mixing up the three clearing member types.

    The names sound alike.

    Fix: Self-clearing: own and clients' trades only. Trading-cum-clearing: also clears for other trading members. Professional: clears for others, does not trade.

  • Believing the SGF is used before the defaulter's margins.

    Students focus on the fund because it is named in the question.

    Fix: The defaulter's own margins and deposits are used first. The fund is a later layer of protection.

Worked examples

Example 1

After a trade is matched on an exchange, the clearing corporation becomes the buyer to the selling member and the seller to the buying member. What is this process called, and what is its main benefit?
A. Netting; lower funds requirement
B. Novation; settlement guarantee through a central counterparty
C. Auction; recovery of short deliveries
D. Rolling settlement; shorter settlement cycle

Show the solution
  1. The description says the original contract is replaced and the clearing corporation steps in between buyer and seller.
  2. This substitution is novation, so A, C and D name different processes.
  3. Netting offsets obligations and does not replace the contract. An auction deals with shortages. Rolling settlement is about the cycle.
  4. Because the CCP stands between the parties, each member's risk is against the CCP, which guarantees settlement.

Answer: B. Novation; settlement guarantee through a central counterparty

Example 2

A clearing member defaults on its settlement obligation. Which resource does the clearing corporation use first?
A. The Settlement Guarantee Fund contributions of all other members
B. The margins and deposits of the defaulting member
C. Funds from the stock exchange's profits
D. Contributions from the investors who traded through the defaulter

Show the solution
  1. Default handling follows a waterfall that starts with the defaulter's own resources.
  2. The defaulter's margins and deposits are already with the clearing corporation, so they are used first.
  3. Other members' contributions to the fund come only later, so A is wrong as a first resource.
  4. Exchange profits and investor contributions are not the first line of defence, so C and D are wrong.

Answer: B. The margins and deposits of the defaulting member

Exam tips

  • Link every guarantee question to novation and the central counterparty. If the option names the exchange as guarantor, it is a trap.
  • Learn the three clearing member types as a set. Questions often ask which one does not trade.
  • For default questions, remember the order: the defaulter pays first, the fund comes after.
  • Read for NOT and EXCEPT. Under 25% negative marking, a careless wrong answer costs you a quarter of that question's marks.
  • Do not confuse the clearing corporation with the clearing bank. The bank moves funds; the corporation guarantees and manages risk.

Practice questions from Market Participants in the Securities Market

Clearing Corporation and Clearing Members in other exams

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

Clearing Corporation and Clearing Members: frequently asked questions

What are the main functions of a clearing corporation?

It acts as central counterparty through novation, determines obligations through netting, collects margins, monitors risk and manages settlement. It also maintains the settlement guarantee fund and handles member defaults.

What is central counterparty clearing in India?

It means the clearing corporation becomes the buyer to every seller and the seller to every buyer after a trade is matched. Members then face the clearing corporation instead of each other. This reduces counterparty risk.

How does the clearing corporation guarantee settlement?

It takes on the trade through novation and backs it with margins, risk controls and the settlement guarantee fund. If a member defaults, it covers the shortfall using the defaulter's resources first and then fund resources, so other members can settle.

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

A trading member is allowed to trade on the exchange. A clearing member settles obligations with the clearing corporation. A trading member that is not a clearing member must clear through one.