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

Clearing and Settlement Agencies and Their Roles

Updated 11 October 2026 · Fact-checked

Clearing and settlement agencies are the institutions that turn a trade into a completed exchange of money and securities. The clearing corporation guarantees and nets obligations. Clearing members settle with it. Custodians confirm institutional trades. Clearing banks move funds. Depositories move securities. Match each task to its agency to answer questions.

Understand Clearing and Settlement Agencies and Their Roles

A trade on an exchange is only a promise. Settlement is when the buyer actually pays and the seller actually delivers. Several agencies share this job, and each has one clear role.

The clearing corporation (for example NSCCL for NSE and ICCL for BSE) sits between the exchange and the members. It works out what each member owes, nets the obligations, and takes on the counterparty risk through novation. After novation the clearing corporation becomes the buyer to every seller and the seller to every buyer. It also runs risk management, collects margins and operates the settlement guarantee fund.

A clearing member is a member of the clearing corporation who is allowed to clear and settle trades. A trading member is a member of the exchange who is allowed to trade. One firm can be both. A trading-cum-clearing member (TCM) clears and settles its own trades, its clients' trades and the trades of other trading members who clear through it. A self-clearing member (SCM) clears and settles only its own trades and its clients' trades. It does not clear for other trading members. A professional clearing member (PCM) only clears and settles trades for others, such as trading members and custodial participants. It does not trade on its own account. A trading member who is not a clearing member must clear through a clearing member.

A custodian holds securities for institutional clients such as mutual funds, FPIs and insurers. It confirms their trades. The clearing member, often a professional clearing member, then settles those trades with the clearing corporation on the custodian's behalf. A depository (NSDL or CDSL) holds securities in electronic form and transfers them by book entry. Securities move from the clearing member's pool account to the buyer's demat account at pay-out. A clearing bank is the bank where clearing members hold a designated clearing account. Funds for pay-in and pay-out move through these accounts.

Key formulas to remember

Novation: Clearing corporation = buyer to every seller + seller to every buyer; This is how the clearing corporation takes counterparty risk and guarantees settlement.
Trading member vs clearing member: Trading member = right to trade on exchange; Clearing member = right to clear and settle with clearing corporation; A trading-cum-clearing member has both rights.
Types of clearing member: Trading-cum-clearing (TCM) = own + clients + other trading members | Self-clearing (SCM) = own + clients only | Professional clearing (PCM) = others only; TCM also clears for other trading members. SCM does not. PCM clears for others and does not trade on its own.
Agency to task: Funds: clearing bank | Securities: depository | Institutional trades: custodian | Netting and guarantee: clearing corporation; Use this match to eliminate wrong options.

How to solve Clearing and Settlement Agencies and Their Roles questions

Most questions ask who does what. Use a fixed method to find the right agency.

1Read the question and underline the action: guarantee, net, hold securities, move funds, confirm institutional trade or clear for others.
2Decide whether it concerns money, securities or risk.
3Money points to the clearing bank. Securities point to the depository. Risk, netting and guarantee point to the clearing corporation.
4If the client is an institution, think of the custodian and its link to a professional clearing member.
5If the question compares member types, ask: does it trade, clear, or both, and for whom?
6Eliminate options that give an agency a task outside its role.
7Check words like only, always and all before choosing, since NISM uses them in trap options.

Quickest way: Task-to-agency matching

When to use it: Use this for any one-line who-does-what question when time is short.

Spot the verb in the question.
Match it: guarantee or net means clearing corporation; hold or transfer securities means depository; pay funds means clearing bank; institutional confirmation means custodian.
For member types, remember: TCM clears own, clients and other trading members; SCM clears own and clients only, not other trading members; PCM clears only for others.
Pick the option that matches and skip the rest.

Common mistakes in Clearing and Settlement Agencies and Their Roles

Saying the exchange guarantees settlement.
Students link trading and settlement to the same body.
Fix: The clearing corporation guarantees settlement through novation and the settlement guarantee fund.
Treating trading members and clearing members as the same.
Many large firms hold both roles, so the difference gets blurred.
Fix: Trading is a right on the exchange. Clearing is a right with the clearing corporation. Some firms hold only one.
Thinking a professional clearing member can trade for itself.
The word member suggests trading rights.
Fix: A PCM only clears and settles for others, such as trading members and custodial participants.
Giving the depository the job of moving funds.
Pay-in and pay-out involve both funds and securities.
Fix: Funds move through clearing banks. Securities move through the depository.
Believing custodians trade for institutions.
Custodians appear in institutional trade flows, which looks like trading.
Fix: A broker trades. The custodian confirms the trade and holds the securities safely. A clearing member, often a PCM, settles the trade with the clearing corporation on the custodian's behalf.

Worked examples

Example 1

Which of the following best describes a professional clearing member?
A) A member that trades only on its own account
B) A member that clears and settles trades for others but does not trade on its own
C) A bank that holds clearing accounts
D) A depository participant that opens demat accounts

Show the solution

The key word is professional clearing. It points to clearing, not trading.
A PCM clears trades for trading members and custodial participants.
Option A describes a proprietary trader, not a clearing member.
Option C describes a clearing bank. Option D describes a depository participant.
Only option B fits.

Answer: B

Example 2

After a trade is executed, the clearing corporation becomes the buyer to the seller and the seller to the buyer. What is this process called and what does it achieve?
A) Netting, which reduces the number of trades
B) Novation, which makes the clearing corporation the counterparty and guarantor
C) Pay-out, which delivers securities
D) Custody, which safekeeps assets

Show the solution

The question describes replacing the original counterparties with the clearing corporation.
That is novation, not netting. Netting offsets obligations.
Novation means the original buyer and seller no longer face each other. Each faces the clearing corporation.
This lets the clearing corporation guarantee settlement.
Options A, C and D describe other processes.

Answer: B

Exam tips

Expect who-does-what questions. Learn one task per agency and keep it exact.
Know the three clearing member types and the key word for each: both, own and clients, others only.
Watch for options that swap the roles of depository and clearing bank.
Series VII has 25% negative marking, so guess only when you can eliminate at least one option; otherwise consider skipping.
Know that NSCCL serves NSE and ICCL serves BSE.

Practice questions from Settlement Process

Clearing and Settlement Agencies and Their Roles: frequently asked questions

What is the role of NSCCL?

NSCCL is the clearing corporation for NSE. It nets member obligations, acts as the counterparty through novation, manages risk and runs the settlement guarantee fund.

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

A trading member has the right to trade on the exchange. A clearing member has the right to clear and settle trades with the clearing corporation. One firm can be both.

Who are professional clearing members?

They are clearing members that only clear and settle trades for others, such as trading members and custodial participants. They do not trade on their own account.

What do custodians do in settlement?

Custodians serve institutional clients. They confirm trades and hold securities safely. A clearing member, often a professional clearing member, settles the trades with the clearing corporation on the custodian's behalf.