During
a trading process an investor buys the shares and sells the shares and
after the trade execution the buyer and the seller receives the shares and
funds respectively. This is what the process in stock exchange looks like.
But in reality there is much more complex process that goes on at the back
end. The transactions in secondary market pass through three distinct
phases, viz., trading, clearing and settlement. While the stock exchanges
provide the platform for trading, the clearing corporation determines the
funds and securities obligations of the trading members and ensures that
the trade is settled through exchanges of obligations. The clearing banks
and the depositories provide the necessary interface between
the custodians/clearing members for settlement of funds and securities
obligations of trading members. The clearing process involves
determination of what counter-parties owe, and which counter-parties are
due to receive on the settlement date, thereafter the obligations are
discharged by settlement.
The
System applicable in India today is Rolling Settlement. One of the greatest
achievements of the current system is settlement of trades within three
working days, i.e. T+2 rolling settlement which has replaced account
period settlement, which used to take at least a week. days later.
This is called ‘T+X’ rolling settlement, where ‘T’ is the trade date and
‘X’ is the number of business days after trade date on which settlement
takes place. The rolling settlement prevailing in India is T+2, implying
that the outstanding positions at the end of the day ‘T’ are compulsorily
settled 2 days after the trade date.
Understanding
Rolling Settlement :-
Rolling
Settlement involves for major activities. Trading, Clearing, Settlement and
Post Settlement(Post settlement has not been explained in this post).
