MBA (Finance) – IV Semester, Investment and Portfolio Management, Unit 1.4
Define Settlement
Trading in stock exchanges is carried out in two phases. In the first phase, the execution of the orders submitted by clients takes place between brokers acting on behalf of the clients or investors. Buy orders are matched with sell orders. In the automated system, trading is carried out in an anonymous environment and the orders are matched by the computer system.
Settlement
Trading in stock exchanges is carried out in two phases. In the
first phase, the execution of the orders submitted by clients takes place
between brokers acting on behalf of the clients or investors. Buy orders are
matched with sell orders. In the automated system, trading is carried out in an
anonymous environment and the orders are matched by the computer system.
The buyer now has to hand over the money and receive the security;
the seller on the other hand has to hand over the security and receive money on
account of the sale of the security. This process of transfer of security and
cash is done in the second phase which is known as the settlement of the trade.
The settlement process involving delivery of securities and payment of cash is
carried out through a separate agency known as the clearing house which
functions in each stock exchange. The clearing house acts as the counter party
for each trade. Member-brokers who sell securities have to deliver the
securities to the clearing house and will receive cash from the clearing house.
Similarly, the member- brokers who buy securities will have to pay cash to the
clearing house and receive the securities from the clearing house. The stock
exchanges now follow a settlement procedure known as Compulsory Rolling
Settlement (CRS) as mandated by SEBI.
Under the rolling settlement system, the trades executed on a particular day are settled after a specified number of business days or working days. Initially, a T + 5 settlement cycle was introduced, which was subsequently reduced to a T + 3 cycle. Currently, a T + 2 settlement cycle is adopted by the stock exchanges. This means that the settlement of transactions done on T, that is, the trade day, has to be done on the second business day after the trade day. The pay-in and pay-out of funds and securities has to take place on the second business day after the day of trade. For example, for an order executed on Tuesday of a week, the settlement (delivery of security and payment of cash) has to be done on Thurs-day. The pay-in and pay-out of funds and securities are marked through the clearing house.
On the first business day (T + 1) after the trade day (T), the
exchange generates delivery and receive orders for transactions done by
member-brokers. These provide the relevant information regarding the securities
to be delivered /received by the member-brokers through the clearing house.
Similarly, a money statement showing the details of payments/ receipts of
monies by the member-brokers is also prepared by the exchange. The Delivery/
Receive orders and the Money Statement can be downloaded by the member-brokers.
On the second business day (T + 2) after the day of trade, the
member-brokers are required to submit the pay-in instructions to the
depositories for transfer of securities to the clearing house in the case of
demat securities. In the case of securities in physical form, the certificates
have to be delivered to the clearing house. For pay-in of funds by
member-brokers, the bank accounts of member-brokers maintained with the
authorised clearing banks are directly debited through the computerised system.
For pay-out of securities by the stock exchange, the member-brokers
are required to collect them from the clearing house on the pay-out day, in
case of physical securities. The clearing house arranges for crediting the
securities to the demat accounts of member-brokers; in the case of demat
securities. There is a facility for direct transfer of securities to the
investors’ accounts also.
For pay-out of funds by the stock exchange, the bank accounts of
member-brokers with the authorised clearing banks are credited by the clearing
house. In the rolling settlement system, pay-in and pay-out of both funds and
securities are completed on the same day.
The member-brokers are required to make payment to clients for
securities sold and deliver securities purchased by clients within one working
day. This is the time frame permitted to member-brokers to settle their
obligations with the clients as per the by-laws of the exchange
