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

Settlement of Institutional and Custodial Trades in India

Updated 11 October 2026 · Fact-checked

An institutional trade is done by a broker for a client who has a custodian. The trading member flags it as custodial by entering the custodian's code, and the custodian confirms it on the clearing corporation's system by the cut-off time. Once confirmed, the custodian settles it. If it is not confirmed, the trading member settles it.

Understand Settlement of Institutional and Custodial Trades

Large investors such as mutual funds, FPIs and insurers do not hand over money and shares to their broker. They appoint a custodian, a SEBI-registered entity that holds their securities and cash and settles their trades. The broker only executes the trade.

This creates a problem. The broker knows the trade details, but the custodian is the one who must pay or deliver. So the custodian must agree that the trade is genuinely the client's before it settles. That agreement process has two parts.

Flagging is done by the trading member (the broker). At order or trade entry, the trading member enters the custodian's code, which marks the trade as a custodial trade. Confirmation is done by the custodian. The custodian confirms the trade on the clearing corporation's system by the cut-off time. This is the custodian's acceptance that it will settle the trade.

Once the custodian confirms within the permitted time, settlement responsibility moves from the trading member to the custodian. The custodian then pays funds or delivers securities on the pay-in day through its own clearing bank and depository account. If the custodian does not confirm in time, or rejects the trade, the trading member stays responsible and settles it like any other trade.

For the exam, remember who acts at each step and who carries the risk. The custodian's confirmation is what transfers settlement responsibility. Exact cut-off times are set by the exchange and clearing corporation and can change, so learn the sequence, not a clock time.

Key formulas to remember

Sequence of a custodial trade: Trade execution with custodian code → Custodian confirms on clearing corporation's system by cut-off → Netting/obligation → Pay-in and pay-out; Settlement responsibility shifts to the custodian only after it confirms the trade.
Who settles: Confirmed by custodian → custodian settles; not confirmed, rejected or late → trading member settles; The trading member remains liable for a trade the custodian does not confirm.
Roles: Trading member = executes and flags the trade as custodial; Custodian = confirms and settles; Clearing corporation = guarantees and nets; Do not swap the trading member's and the custodian's actions in options.

How to solve Settlement of Institutional and Custodial Trades questions

Use this method for any question on institutional or custodial trade settlement.

1Identify the client type. If it is a mutual fund, FPI, insurer or other institution using a custodian, treat it as a custodial trade.
2Place the trade in the sequence: execution with custodian code, custodian confirmation, settlement.
3Check who is acting in the question. The trading member executes and flags the trade; the custodian confirms it.
4Check whether the custodian confirmed on time. If yes, the custodian settles; if no, the trading member settles.
5Check the settlement leg: pay-in and pay-out go through the custodian's clearing bank and depository account.
6Eliminate options that say a custodial trade settles through the custodian without its confirmation, or that the trading member is free of liability when the custodian does not confirm.
7Pick the option that matches the sequence and the liability rule.

Quickest way: Two-question shortcut

When to use it: Use when the question asks who is responsible or what happens next.

Ask: did the custodian confirm? Yes means custodian settles. No means the trading member settles.
Ask: which step is this? Trading member executes and flags, custodian confirms, then settlement.
Reject any option where the custodian executes the trade, or where the trading member is released without the custodian's confirmation.

Common mistakes in Settlement of Institutional and Custodial Trades

Saying the broker confirms the trade to the custodian.
The broker sends the trade details, so it feels like the broker confirms.
Fix: The broker only executes the trade and flags it as custodial. The custodian confirms the trade on the clearing corporation's system and thereby takes on settlement responsibility. Some texts call this acceptance affirmation; both terms refer to the custodian's acceptance of the trade.
Thinking the custodian is always liable after execution.
Students forget the confirmation condition.
Fix: Liability shifts only after the custodian confirms. Otherwise the trading member settles.
Memorising exact cut-off times as fixed.
Workbooks mention timelines that exchanges can revise.
Fix: Learn the sequence and the consequence of missing the deadline, and check the latest workbook for times.
Believing the client investor settles directly.
Retail trades settle through the broker, so students generalise.
Fix: For institutional trades, the custodian holds assets and handles pay-in and pay-out.
Confusing custodians with depository participants.
Both deal with securities accounts.
Fix: A custodian is a settlement and safekeeping agent for institutions; a DP only provides demat account services.

Worked examples

Example 1

A mutual fund buys shares through a broker. The custodian confirms the trade within the permitted time. Who is responsible for settling the trade?
A. The broker
B. The custodian
C. The mutual fund directly
D. The stock exchange

Show the solution

The client is an institution with a custodian, so this is a custodial trade.
The custodian confirmed in time.
Confirmation transfers settlement responsibility to the custodian.
So the custodian pays or delivers on the pay-in day.
Once the custodian confirms, the custodian is responsible for settling the trade. The clearing corporation guarantees settlement.

Answer: B. The custodian

Example 2

An FPI trade is executed by a broker, but the custodian does not confirm it by the deadline. What is the position?
A. The trade is cancelled
B. The FPI settles directly
C. The trading member must settle it
D. The clearing corporation absorbs it

Show the solution

Custodian confirmation did not happen on time.
The trade does not become a custodial trade.
Responsibility stays with the trading member who executed it.
The trade is not cancelled; it still has to settle.

Answer: C. The trading member must settle it

Exam tips

Questions usually test who does what: the broker executes and flags the trade, the custodian confirms and settles.
Watch for the phrase 'not confirmed by the custodian'. It points to the trading member as the settling party.
Do not spend time on clock times; focus on sequence and liability.
In Series VII, wrong answers cost 25% of the question's marks, so guess only after removing options.

Practice questions from Settlement Process

Settlement of Institutional and Custodial Trades: frequently asked questions

What is custodial trade confirmation?

The trading member executes the trade and flags it as custodial by entering the custodian's code. The custodian then confirms the trade on the clearing corporation's system by the cut-off time. That confirmation decides whether the custodian or the trading member settles.

Who settles a custodial trade?

The custodian settles it if it confirms the trade in time. If it does not, the trading member who executed the trade settles it.

Why do institutions use custodians?

Custodians safely hold securities and cash and handle settlement. This separates trade execution from asset holding, which lowers operational risk.

Is the exact cut-off time asked in NISM Series VII?

Timings are set by exchanges and clearing corporations and can change. Learn the sequence and the effect of missing the deadline, and check the current workbook.