NISM-Series-VII: Securities Operations and Risk Management · Market Participants in the Securities Market
Custodians, Clearing Banks and Professional Clearing Members
Updated 11 October 2026 · Fact-checked
A custodian safekeeps securities and settles trades for institutional clients. A clearing bank moves funds between clearing members and the clearing corporation. A professional clearing member (PCM) clears and settles trades for others, such as custodian-settled institutional trades, but does not trade on its own account.
Understand Custodians, Clearing Banks and Professional Clearing Members
Every trade ends in two transfers: money and securities. Different entities handle each link. If you know who does what, most questions become easy.
A custodian works for institutional clients such as mutual funds, FPIs, insurers and banks. It holds their securities in dematerialised form, settles their trades, collects dividends and interest, and handles corporate action benefits. In India, custodians must be registered with SEBI.
A clearing bank is a bank that the clearing corporation uses for funds settlement. Clearing members keep a designated account with it. On settlement day, funds pay-in is debited from member accounts and pay-out is credited. The clearing corporation does not move cash through its own books. It uses clearing banks.
A professional clearing member (PCM) is a clearing member that is not a trading member. It does not trade for itself. It clears and settles trades for trading members and for custodial clients. Custodians often act as PCMs on exchanges. The institution trades through a broker, and the trade is then confirmed to the custodian, which settles it.
Do not mix up a custodian with a depository participant (DP). A DP is the agent of a depository and opens demat accounts for investors. A custodian is a safekeeping and settlement agent for institutions, and it also acts as a DP to hold securities.
Key formulas to remember
- Custodian role
- Institutional client → trades via broker → trade confirmed to custodian → custodian settles
- The broker executes. The custodian settles. This is the flow behind custodial trades.
- PCM definition
- PCM = clearing member without trading rights
- It clears for others and does not trade on its own account.
- Clearing bank role
- Funds pay-in and pay-out = via clearing bank accounts of members
- Securities move through depositories. Funds move through clearing banks.
- Custodian vs DP
- Custodian = institutional safekeeping and settlement; DP = depository's agent for demat accounts
- A custodian usually also holds DP registration, but the roles are distinct.
How to solve Custodians, Clearing Banks and Professional Clearing Members questions
Use this method for any question about who does what in settlement.
- 1Identify the client type in the question: institution or retail investor.
- 2Decide whether the question concerns securities, funds or both.
- 3For securities, think depository and DP. For institutional safekeeping, think custodian.
- 4For funds, think clearing bank and the member's designated account.
- 5For clearing without trading, think professional clearing member.
- 6Check the trap words: 'trading member', 'own account', 'demat account opening'.
- 7Eliminate options that give one entity another's function, then choose the remaining one.
Quickest way: Match the entity to its verb
When to use it: Use when you have under a minute and the options name different entities.
- Safekeeps and settles for institutions: custodian.
- Moves money for settlement: clearing bank.
- Clears for others and never trades: PCM.
- Opens demat accounts for investors: DP.
- Pick the option whose verb matches.
Common mistakes in Custodians, Clearing Banks and Professional Clearing Members
Saying a custodian opens demat accounts for retail investors.
Custodians also hold DP registration, so the roles blur.
Fix: Link retail demat opening to the DP. Link institutional safekeeping and settlement to the custodian.
Thinking a PCM can trade on its own account.
Students read 'member' and assume trading rights.
Fix: A PCM has no trading rights. It only clears and settles for others.
Saying the clearing bank settles securities.
The word 'clearing' suggests all settlement.
Fix: Clearing banks handle funds only. Securities move through depositories.
Believing the custodian executes the institution's trade.
Students merge execution with settlement.
Fix: The broker executes. The custodian confirms and settles.
Treating the clearing corporation as the holder of member funds in its own books for pay-in and pay-out.
Students skip the bank layer.
Fix: Remember that members hold designated accounts with clearing banks, and settlement runs through them.
Worked examples
Example 1
A mutual fund buys shares through a broker. Which entity settles the trade on the fund's behalf after confirmation?
A. Clearing bank
B. Custodian
C. Trading member's research desk
D. Investor protection fund
Show the solution
- The client is an institution, a mutual fund.
- The broker has executed the trade. The next step is settlement.
- Settlement and safekeeping for institutions is done by the custodian.
- A clearing bank only moves funds. The other two options have no settlement role.
Answer: B. Custodian
Example 2
Which statement about a professional clearing member is correct?
A. It trades on its own account and for clients
B. It opens demat accounts for retail investors
C. It clears and settles trades for others without trading itself
D. It issues securities for companies
Show the solution
- A PCM is a clearing member without trading rights.
- So option A is wrong, since it says the PCM trades.
- Option B describes a depository participant.
- Option D describes an issuer-side function.
- Option C matches the PCM definition.
Answer: C. It clears and settles trades for others without trading itself
Exam tips
- Expect direct 'who performs this function' questions. Learn one verb per entity.
- Watch for custodian versus DP options. The institutional word usually points to the custodian.
- Remember that PCMs do not trade. Options that say otherwise are traps.
- Under negative marking, skip only if two options remain equally likely after elimination.
Practice questions from Market Participants in the Securities Market
- A broker's client wants to complain that a Depository Participant, which is a separate group entity of the broker, delayed a transfer instru…
- A sub-broker arrangement was historically used by trading members. Under the current SEBI framework, how are intermediaries who earlier oper…
- Which of the following entities acts as the legal counterparty to every trade that is novated to it in the cash segment, thereby guaranteein…
- Which of the following entities acts as the legal counterparty to every trade by guaranteeing settlement after novation in the Indian cash m…
- A trading member wants to carry out proprietary trades and client trades on the exchange, and also wants to settle its own trades without de…
Custodians, Clearing Banks and Professional Clearing Members: frequently asked questions
What is the role of a custodian in the securities market in India?
A custodian safekeeps securities of institutional clients and settles their trades. It also collects dividends and interest and handles corporate action benefits. Custodians are registered with SEBI.
What is a professional clearing member?
A PCM is a clearing member that has no trading rights. It clears and settles trades for trading members and for custodial clients. It does not trade on its own account.
What does a clearing bank do in settlement?
A clearing bank handles the funds leg of settlement. Clearing members hold designated accounts with it, and pay-in and pay-out of funds happen through these accounts.
What is the difference between a custodian and a depository participant?
A DP is an agent of a depository and provides demat account services to investors. A custodian safekeeps assets and settles trades mainly for institutions. A custodian often holds DP registration too, so one firm can play both roles.