The Complete Trading Cycle

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).

Trading Activities (T Day)

T stands for trading. Trading can be done the entire day i.e. from 09:55 am to 3.30 pm in the four major segments of the capital market, namely, Equity segment; Futures and Options segment (F&O); Retail debt market (RDM) and Wholesale debt market (WDM). We can buy and sell shares in any Stock Exchange where that share is listed, but only through member brokers registered with the SEBI and the Stock Exchange concerned. For this to happen one has to open a trading account with a broker, place the order to purchase/sell the shares and make the payment/delivery for the purchase/sell obligation plus pay brokerages and other charges.

When placing orders, we can set certain conditions to suit our requirements. We can set a limit like a Day order. This is valid for a day it is entered and if not matched during the day, would get cancelled at the end of the trading day. We can also place an Immediate or Cancel Order (IOC) to buy or sell. As soon as an IOC order is released into the market, it is either executed if a match occurs or else the order will be removed from the market.

Like we specify the time, we can also define the price conditions. If we place a Stop Loss (SL) order, it gets activated only when the market price of the relevant security reaches or crosses a threshold price known as the trigger price. Until then the order does not enter the market. Another possibility is to specify the quantity. we can place a Disclosed Quantity (DQ) order, which allows broker to disclose only a part of our total order quantity to the market. For example, we can place an order for 10000 shares with a disclosed quantity condition of 1000. Only 1000 is displayed to the market at a time. After this quantity is traded, another 1000 is automatically released till the full order is executed.

Clearing Activities (T+1 Day)

Clearing is a process of determination of obligations, after which the obligations are discharged by settlement. Trades done during the entire day are accounted together for netting of obligations. The NSCCL(National Securities Clearing Corporation Ltd) gets the information from the NSE about the trades executed during the day which helps the CC (Clearing Corporation) to determine the obligations of each member in terms of funds and securities.

This is the next working day after the trading day. On this day, by 11:00 am the NSCCL gives the confirmation of all trades. Once the netting of obligations is done, then by 1:30 pm on the same day, all the files are being processed and downloaded so that each member knows as to what he has to pay-in and receive.

Settlement Activities (T+2 Day)

a. Pay in and Pay out of funds :-

NSCCL offers Clearing Members the facility of settlement of funds obligations through 13 Clearing Banks. Clearing Banks debit/credit the clearing account of clearing members as per instructions received from the NSCCL electronically. Member’s account may be debited for various types of transaction on a daily basis. A member is required to ensure that adequate funds are available in the clearing accounts towards all obligations, by the scheduled date and time. It is possible that the total value of funds pay-in receivable by a bank is different from the value of funds pay-out from the bank, i.e. the pay-in may be either more than the pay-out in a bank, or vice-versa. In such cases, funds need to be transferred from the bank where there is excess pay-in to the bank from where there is a shortage in pay-in. Based on estimated pay-in and pay-out of funds, on the day preceding the pay-out day, NSCCL advises the banks having pay-in in excess of pay-out to issue pay orders to the banks having pay-in less than the pay-out. The deficit banks accordingly get the funds to facilitate timely pay-out.

b. Pay-in and Pay-out of Securities

In order to settle trades in the dematerialized securities, a clearing member needs to open a clearing account with a depository participant (DP). Each clearing account consists of three sub-accounts:

1. Pool Account:  This is used by the clearing member to interface with his clients. The clients deliver securities to this account of the clearing member. The clearing member pools all client deliveries in this account before making a delivery to NSCCL.

2. Delivery Account:  This is used by the clearing member to deliver securities to NSCCL. The clearing member moves net deliverable quantity of shares from the pool account to the delivery account from where it comes to NSCCL.

3. Receipt Account:  NSCCL gives pay-out to the clearing member in the receipt account from where it is transferred to the pool account of the clearing member.

Before pay-in, selling investors instruct DP to transfer security balances from their beneficiary accounts to clearing member’s pool account. At or before the time and day specified for pay-in by NSCCL, the clearing member instructs his DP to move the required balance from his pool account to his delivery account. On the pay-in day, the depository moves balances from all the clearing members delivery accounts and sends them to NSCCL at the scheduled time. The balance in respective clearing members’ delivery accounts are first transferred to NSCCL’s pool account which is then matched with the obligations generated by NSCCL system. The quantity and securities matched are accepted and credited to the Receipt Accounts of the receiving clearing members through depository. The quantity and securities, not matched for any reason whatsoever, are not accepted and as such credited back to Delivery Accounts of the delivering clearing members. On receipt of pay-out instructions from NSCCL, the depository credits the receipt accounts of the receiving clearing members from which the securities get transferred to the clearing members’ pool accounts. From the pool accounts, the clearing members distribute the deliveries to the buying clients by issuing instructions to his DP.