clearing Archives - Stocksbaazigar

Clearing and Settlement

8th February 2019 by stocksbaazigar

Clearing refers to the process of comparing trades before settlement date or the determination of the net obligation of the broker participants (for both securities and cash) The settlement process refers to the exchange of cash and securities on the contractual settlement date. The settlement date can be agreed upon at trade execution or can be prescribed by local trading conventions Clearing and Settlement mechanism in India has witnessed several innovations wiz State-of-art information technology, Compression of Settlement Cycle, Dematerialization and electronic transfer of securities, Securities lending and borrowing, Professionalization of trading members, Fine-tuned risk management system, Emergence of clearing corporations to assume counterparty risk etc. Transaction Cycle A transaction cycle depicts the steps followed by a client in order to execute a trade wherein a buy order matches with a sell order. Step 1: Decision to trade Step 2: Placing Order Step 3: Trade Execution Step 4: Clearing of trades Step 5: Settlement of trades Step 6: Funds/Securities DAY Timings Job Performed T (Trade Day) 9:55 a.m to 3:30 p.m Buy/Sell securtities T+1 By 11:00 a.m. Confirmation of all trades By 1:30 p.m. Processing and downloading of files to brokers/custodians T+2 By 11:00 a.m. Pay-in of securities and funds By 1:30 p.m. Pay-out of Securities and Funds Why Clearing? Clearing is necessary for the matching of all buy and sell orders in the market. It provides smoother and more efficient markets. Parties can make transfers to the clearing corporation, rather than to each individual party with whom they have transacted. The agency reports discrepancies to traders in case the reports do not match, who then try to resolve them. It ensures that trades are settled in accordance with market rules by managing past trading and pre-settlement credit exposures. Settlement Settlement takes place once clearing process in performed. The settlement agency receives cash from buyers and securities from sellers and, at the end of the process, gives the securities to the buyer and the cash to the seller. The timing of payment will depend on the settlement time of the transaction. The buyer must make payment within the settlement period, while the seller must deliver the purchased security within this period. Core Functions Involved in Settlement Process Trade recording: Key details about the trades Trade Confirmation: Counterparties agree upon the terms of trade Determination of Obligation: determine what they owe/dues Pay-in of Funds and Securities: Funds/securities are brought in to NSCCL/CH Pay-out of funds and Securities: Release of pay-out out of funds/securities Risk Management: For an efficient settlement system.

Stock Trading on NEAT and BOLT

2nd February 2019 by stocksbaazigar

Trading, Clearing and Settlement The trading in securities is buying and selling of securities listed on the recognized stock exchanges. The clearing is a process of determination of obligations of member-brokers by the stock exchanges after which the same are discharged by the concerned parties by settlement. The settlement is a process of settling of transactions in securities between buyers and sellers by exchange of money and securities respectively. Stock trading The trading on stock exchanges in India was in open outcry manner till mid 1990s. In order to provide efficiency, liquidity and transparency, NSE introduced, a nationwide, on-line, fully-automated Screen based trading system (SBTS) in November 1994 known as National Exchange for Automated Trading (NEAT) system. BSE online trading (BOLT) by BSE started in March 1995 Screen based trading system NEAT and BOLT are state-of-the-art client-server based applications where at the server end all trading information is stored in in-memory databases to achieve minimum response time and maximum system availability for users. A member, broker enter orders from the Trader Work Stations (TWSs) installed in their offices. A client of these broker can place orders through phone/internet for which he should enter Model Agreement with brokers first. Internet based trading There are many brokers who provide internet based trading facility to their clients. Investors can buy/sell securities through Trader Terminals downloaded on their computers, Trading Apps on their mobiles etc. Both NSE and BSE systems run on ‘Order driven’ systems What is ‘order-driven’ system? In an order-driven system, the traders only put their orders for buying or selling of securities whereas, in ‘quote-driven’ system, the jobbers put buy as well as sell quotes in the same scrip with a price difference. The order-driven system ensures faster processing, matching and execution of orders in a transparent manner. NSE system, is order driven from the beginning while BSE system turned completely order-driven after 13th August 2001. Till then it was both order and quote driven. Trading Hours Regular Trading in equities on the NEAT and BOLT systems are conducted from Monday to Friday between 9:15 a.m. to 3:30 p.m. Thus uniform trading hours are followed by both the stock exchanges. Pre-open session : 9:00 to 9:08 Block deal sessions: 8:45 a.m – 9:00 a.m and 2:05 p.m. – 2:20 p.m Closing session: 15:40 hrs to 16:00 hrs Why trade on recognized stock exchanges only? Investors do not get any protection if he trades outside a stock exchange. Investors gets best prices prevailing in the market on Stock Exchanges No counter-party risk involved Access to investor grievance and redressal mechanism of stock exchanges Protection up to a prescribed limit from the Investor protection fund How to know if the broker or sub broker is registered? Investor should check the Registration Certificate issued by SEBI A broker’s registration number begins with letters ‘INB’ and that of a sub-broker with the letters ‘INS’ The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note. What is contract note? Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle the disputes/claims between the investor and trading member.