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NISM-Series-VIII: Equity Derivatives · Accounting and Taxation

Accounting Treatment for Clearing Members and Brokers in Derivatives

Updated 11 October 2026 · Fact-checked

A trading member or clearing member records client margins as liabilities to clients, not as its own income. Brokerage is income. Daily mark-to-market settlements are recorded as amounts payable to or receivable from the clearing corporation, and matched against client dues. Keep client money and own money separate.

Understand Accounting Treatment for Clearing Members and Brokers

Start with one idea: a broker holds other people's money. When a client gives you margin, the money is not yours. It sits on your books as a liability to that client, and it must be kept separate from your own funds.

In the derivatives segment, a trading member (TM) deals with clients. A clearing member (CM) settles trades with the clearing corporation. A TM may clear its own trades (a TM-CM), or may use a separate CM. The CM collects margins from the TM, and the TM collects margins from clients. Each layer keeps its own records.

Brokerage is different. It is the fee for service, so it is the member's income. Exchange transaction charges, SEBI turnover fees, stamp duty and similar levies are collected from the client and paid on. GST on brokerage is a tax collected and paid to government, not income.

Mark-to-market (MTM) profits and losses are settled in cash every day through the clearing corporation. For the member, the MTM amount is a pass-through. A client's MTM loss is a receivable from the client. The matching amount due to the clearing corporation is a payable. A client's MTM profit is a payable to the client.

Exam questions test classification: is this item a liability, an asset, or income? They also test the segregation principle, that client funds are never used for the member's own purposes or for another client's dues. Treat the NISM workbook wording as final if it differs from this summary.

Key formulas to remember

Client margin received
Bank (asset) ↑ and Client margin / deposit (liability) ↑
Margin is not income and not the member's own money.
Brokerage
Brokerage earned = Income; GST on brokerage = Liability to government
Only the brokerage portion is revenue.
Client MTM loss
Receivable from client ↑ and Payable to clearing corporation ↑
Member pays the clearing corporation and then recovers from the client.
Client MTM profit
Receivable from clearing corporation ↑ and Payable to client ↑
Credit to the client is made from funds received from the clearing corporation.
Segregation principle
Client funds ≠ Member's own funds
Client money cannot be used for proprietary trades or other clients' dues.

How to solve Accounting Treatment for Clearing Members and Brokers questions

Use this method for any question on how a member records a derivatives item.

  1. 1Identify who is recording: trading member, clearing member or TM-CM.
  2. 2Identify the item: margin, brokerage, charges, MTM or settlement.
  3. 3Ask whose money it is. Client money means a liability or a pass-through. Fee for service means income.
  4. 4Check the direction: is money being received from, or owed to, the client or clearing corporation?
  5. 5Decide the entry: asset, liability or income, and which side of the books.
  6. 6Check segregation: reject any option that mixes client funds with own funds.
  7. 7Eliminate options that treat margin or MTM as the member's income.

Quickest way: Whose money, which label

When to use it: Use when an MCQ asks how an item is treated and you have under a minute.

  1. Margin or deposit from client: liability to client.
  2. Brokerage: income.
  3. Taxes and statutory levies collected: payable to the authority.
  4. MTM: receivable or payable, never income.
  5. Pick the option that keeps client funds separate.

Common mistakes in Accounting Treatment for Clearing Members and Brokers

  • Treating client margin as the member's income

    Money enters the bank account, so it feels like revenue.

    Fix: Cash received is not income. Margin is a liability until it is adjusted or returned.

  • Treating MTM gains or losses as the member's profit or loss

    Students link MTM with the client's P&L and forget the member is an intermediary.

    Fix: Record MTM as receivable or payable between client and clearing corporation.

  • Counting GST or exchange charges as brokerage income

    They appear on the same contract note.

    Fix: Only the brokerage is income. Other items are collected and passed on.

  • Using one client's funds to cover another client's dues

    It looks efficient when accounts are pooled.

    Fix: Remember the segregation rule: each client's money is used only for that client.

  • Mixing up the TM and the CM roles

    One firm may hold both roles.

    Fix: Ask who owes whom. The CM deals with the clearing corporation, the TM deals with the clients.

Worked examples

Example 1

A client gives a trading member ₹5,00,000 as margin for futures trading. How should the member record it?

Show the solution
  1. Whose money is it? The client's.
  2. The member receives cash, so the bank balance rises by ₹5,00,000.
  3. The member owes this to the client, so a liability to the client rises by ₹5,00,000.
  4. No income arises.

Answer: Bank ₹5,00,000 (asset) and client margin ₹5,00,000 (liability). No income is recognised.

Example 2

A client's futures position shows an MTM loss of ₹20,000 for the day. Brokerage charged is ₹1,000. How does the member treat these amounts (ignore taxes)?

Show the solution
  1. The MTM loss is owed by the client. The member has a receivable of ₹20,000 from the client.
  2. The member owes the same ₹20,000 to the clearing corporation, a payable.
  3. Brokerage of ₹1,000 is a fee for service, so it is income.
  4. The total due from the client is ₹20,000 + ₹1,000 = ₹21,000, of which only ₹1,000 is income.

Answer: MTM ₹20,000 is a receivable from the client and a payable to the clearing corporation. Only the ₹1,000 brokerage is income.

Exam tips

  • Look for the words margin, deposit and brokerage. They signal liability versus income.
  • Reject any option calling MTM or margin the member's income.
  • Segregation of client and own funds is a favourite correct option.
  • Answers with exact rules from the NISM workbook take priority over general accounting intuition.
  • This is not an accounting paper, so focus on classification, not detailed journal entries.

Practice questions from Accounting and Taxation

Accounting Treatment for Clearing Members and Brokers: frequently asked questions

Is client margin income for a broker?

No. Client margin is money held for the client and is shown as a liability to the client. Only brokerage and similar fees for service are income.

How is MTM treated in the broker's books?

MTM is a pass-through amount. A client's loss is a receivable from the client and a payable to the clearing corporation. A client's profit is the reverse.

What does a clearing member do differently from a trading member?

A clearing member settles trades with the clearing corporation and collects margins from its trading members. A trading member deals with clients and collects margins from them.

Can a broker use one client's funds for another client?

No. Client funds must be kept separate from the member's own funds and used only for that client's obligations.