Clearing and Settlement
Clearing and Settlement
This domain tests the post-trade chain: how trades are novated, margined, marked to market and settled, and how physical delivery works. The central idea is that the clearing corporation becomes the counterparty to every trade and manages default risk through margins and a settlement guarantee fund.
Clearing flow
A trade is executed on the exchange and passed to the clearing corporation through clearing members. Novation substitutes the clearing corporation as buyer to every seller and seller to every buyer. Initial margin is collected upfront; MTM losses are settled daily. Cash settlement of MTM obligations generally occurs on a T+1 basis. Final settlement depends on the contract: cash-settled contracts are closed at the final settlement price; physically settled contracts go to delivery.
Delivery mechanics
For physical settlement, the seller submits a delivery intention and delivers the warehouse receipt or electronic negotiable storage receipt (e-NSR) in the approved depository at an approved delivery centre. The buyer pays the final settlement value. Quality is verified by empanelled assayers. Short delivery or failure to pay triggers penalties, close-out and possibly a sales process under exchange rules.
Worked example
A buyer holds one 1 kg gold futures lot at ₹60,000 per 10 g. The next day's settlement price is ₹60,500. MTM gain = 100 × ₹500 = ₹50,000, credited through the clearing member after pay-in. At expiry the final settlement price is used, not the last traded price. If a seller fails to deliver, the exchange's default procedures apply and the buyer is compensated under the prescribed close-out mechanism.
Traps
Do not say the exchange itself takes counterparty risk; the clearing corporation does through novation. Do not confuse funds pay-in with delivery of goods. Do not use the last traded price when the rules specify the final settlement price. Do not assume a warehouse receipt is freely transferable outside the approved depository process.