Clearing and Settlement
Clearing and Settlement
This domain tests the post-trade chain: novation, margining, daily settlement, final settlement and default handling. The focus is on who bears obligations and when cash or securities move.
Core rules
- The clearing corporation - NSCCL for NSE and ICCL for BSE - acts as central counterparty through novation. A trading member clears through a clearing member, who must meet net-worth and collateral requirements.
- Futures are marked to market daily. Gains and losses are paid in or out on the next settlement day, so a profitable position still needs funding until payout.
- Option premium is paid upfront by the buyer and received by the writer; option positions carry margin but are not run through the same daily MTM cash flow as futures.
- Index derivatives are cash-settled at the final settlement price. Single-stock futures and options are physically settled, creating delivery and payment obligations in the underlying shares.
- In-the-money options are exercised and assigned under exchange rules. Clearing members collect margins from trading members, who collect from clients; a shortfall can trigger a margin call or position close-out.
Worked example
A client is long one Nifty futures lot at 22,000; assume lot size 25. On day T the settlement price is 22,100, so MTM profit = 100 × 25 = ₹2,500, credited through the clearing member on T+1. If the position is held to expiry and the final settlement price is 22,250, cumulative profit = 250 × 25 = ₹6,250 before brokerage and STT. Initial margin is released only after the position is closed and obligations are met.
Traps
- Assuming index futures settle by delivery.
- Forgetting T+1 funding of daily MTM.
- Treating option premium as a margin payment.
- Ignoring physical settlement of stock derivatives.
- Mixing up trading-member and clearing-member obligations.