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NISM-Series-VIII: Equity Derivatives · Introduction to Clearing and Settlement System

Clearing Entities and Their Roles in Equity Derivatives

Updated 11 October 2026 · Fact-checked

Clearing entities are the parties that make a derivatives trade settle. The clearing corporation guarantees and settles trades. Clearing members (trading-cum-clearing, professional, self-clearing) clear trades. Clearing banks handle funds. Custodians confirm and settle institutional trades. Questions test who does what and which member type clears for whom.

Understand Clearing Entities and Their Roles

Trading and clearing are two different jobs. Trading is matching buy and sell orders on the exchange. Clearing and settlement is what happens after: working out each member's obligations, collecting margins, guaranteeing the trade and moving money.

The clearing corporation sits at the centre. For NSE, it is NSE Clearing Limited (earlier called NSCCL). It acts as the counterparty to every trade through novation, so the buyer and seller do not face each other's default risk. It also computes obligations, collects margins, runs risk management and manages the settlement guarantee fund. Treat these as its core duties.

Clearing members are the members who are allowed to clear and settle trades with the clearing corporation. Three types matter. A self-clearing member is a trading member with clearing rights, so it trades and it also clears. It clears and settles only its own trades and its clients' trades. A trading member who is also a clearing member (trading-cum-clearing member) trades and clears its own trades, its clients' trades and the trades of other trading members who attach to it. A professional clearing member (PCM) only clears and settles; it does not trade. It clears trades on behalf of other trading members, and also for institutional clients where applicable.

A trading member who is not a clearing member cannot clear on its own. It must attach to a clearing member, which is a trading-cum-clearing member or a professional clearing member. That clearing member then takes on the settlement obligation for those trades.

Clearing banks are the banks through which clearing members settle funds. Each clearing member keeps an account with a clearing bank, and pay-ins and pay-outs of money go through it. Custodians serve institutional clients such as mutual funds and FIIs. A custodian confirms the trades done by the institution and takes responsibility for settling them, so the trade is settled through the custodian's clearing member arrangement. Remember: the clearing bank deals with funds; the custodian deals with institutional trade confirmation and settlement.

Key formulas to remember

Clearing corporation role
Novation + guarantee + margin collection + obligation computation + risk management
It becomes the counterparty to every trade. Do not say it trades or gives investment advice.
Self-clearing member
Trades + clears own trades + own clients' trades only
It is a trading member with clearing rights, so it trades. It does not clear for other trading members.
Trading-cum-clearing member (TM-CM)
Trades + clears own, clients' and attached trading members' trades
A trading member without clearing rights must attach to a clearing member.
Professional clearing member (PCM)
Clears only; does not trade
Clears for trading members and, where applicable, institutional clients.
Clearing bank vs custodian
Clearing bank = funds settlement; custodian = confirmation and settlement of institutional trades
A common pairing trap in MCQs.

How to solve Clearing Entities and Their Roles questions

Use this method for any question on clearing entities. Identify the entity first, then match it to its function.

  1. 1Read the question and underline the entity named: clearing corporation, clearing member type, clearing bank or custodian.
  2. 2Decide whether the question is about trading, clearing, funds or institutional confirmation.
  3. 3Recall the core function: guarantee and novation for the corporation; clearing for members; funds for banks; confirmation for custodians.
  4. 4For member-type questions, ask: does it trade, does it clear, and for whom?
  5. 5Eliminate options that give a clearing role to a pure trading member or a trading role to a PCM.
  6. 6Watch absolute words such as only, never and all, and check them against the definitions.
  7. 7Pick the option that matches the exact function, not a loosely related one.

Quickest way: Three-question filter

When to use it: Use it when you have under a minute for a who-does-what question.

  1. Ask: does the entity trade? A PCM does not.
  2. Ask: does it clear for others? A self-clearing member does not; a PCM and a TM-CM do.
  3. Ask: is it about money or about institutions? Money points to the clearing bank; institutional trades point to the custodian.

Common mistakes in Clearing Entities and Their Roles

  • Saying a professional clearing member can trade.

    The word member suggests trading rights.

    Fix: A PCM only clears and settles. It has no trading rights.

  • Saying a self-clearing member clears for other trading members.

    Students confuse it with a TM-CM or PCM.

    Fix: Self-clearing means own trades and own clients' trades only.

  • Thinking the clearing corporation and the exchange are the same.

    Both are linked to NSE.

    Fix: The exchange provides the trading platform. The clearing corporation guarantees and settles trades.

  • Giving the custodian a funds-handling role like the clearing bank.

    Both appear in settlement flow.

    Fix: The clearing bank moves funds for members. The custodian confirms and settles institutional trades.

  • Assuming every trading member can clear its own trades.

    Students assume trading and clearing come together.

    Fix: A trading member needs clearing rights or must attach to a clearing member.

Worked examples

Example 1

Which of the following clears and settles trades but does not trade in the market? (A) Self-clearing member (B) Trading-cum-clearing member (C) Professional clearing member (D) Trading member

Show the solution
  1. The question asks for a clearer with no trading rights.
  2. A self-clearing member clears its own and its clients' trades, and it also trades.
  3. A trading-cum-clearing member trades as well as clears.
  4. A trading member alone does not clear.
  5. A professional clearing member only clears and settles.

Answer: (C) Professional clearing member

Example 2

A mutual fund trades through a broker. Which entity confirms the trade and takes responsibility for its settlement on behalf of the fund? (A) Custodian (B) Clearing bank (C) Trading member (D) Clearing corporation

Show the solution
  1. The client is an institution, a mutual fund.
  2. Institutional trades need confirmation and settlement responsibility from a custodian.
  3. The clearing bank only handles the funds of clearing members.
  4. The clearing corporation guarantees trades but does not act for one client.
  5. A trading member places orders on the exchange. It does not confirm the institution's trade or take responsibility for settling it on the fund's behalf.

Answer: (A) Custodian

Exam tips

  • Learn the three clearing member types as a table in your head: trades, clears, for whom.
  • Expect one-line definitional MCQs. Match the key verb: guarantees, clears, funds, confirms.
  • Absolute words like only and never are traps. Check them against the definitions.
  • This topic links to novation and margining, so revise those together.
  • NISM-Series-VIII carries negative marking of 25% of the marks assigned to a question for each wrong answer. Avoid blind guesses, but if you can eliminate one or more options, it is reasonable to guess among the rest.

Practice questions from Introduction to Clearing and Settlement System

Clearing Entities and Their Roles: frequently asked questions

What are the types of clearing members on NSE F&O?

The main types are trading-cum-clearing members, professional clearing members and self-clearing members. Each differs in whether it trades and for whom it clears.

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

A trading member places orders on the exchange. A clearing member settles trades with the clearing corporation. One firm can be both, but a trading member without clearing rights must use a clearing member.

What does the clearing corporation do?

It acts as counterparty to every trade through novation and guarantees settlement. It also computes obligations, collects margins and manages risk.

What is a custodian in derivatives settlement?

A custodian serves institutional clients such as mutual funds and FIIs. It confirms their trades and takes responsibility for settling them.