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Clearing & Settlement Process in stock markets:

As we all know, Stock Exchange is an entity which facilitates dealing in securities. Dealing in stock exchanges is done through registered members (also called brokers), who transact business primarily on behalf of their clients (or investors). For those who are actively involved in stock market trading, it's always advisable to know the processes involved in it.

Cycle Trader

Clearing and Settlement activity constitutes the core part of equity trade life cycles. After any equity deal is confirmed (when equities are obliged to change hands), the broker who is involved in the transaction issues a Contract Note to the Investor which has all the information about the transactions in detail, at the end of the trade day. In response to the Contract Note issued by broker, the investor now has to settle his obligation by either paying money (if his transaction is a buy transaction) or deliver the shares (if it is a sell transaction).

Clearing House is an entity of the stock exchange through which settlement of equities happens. The details of all transactions performed by the brokers are made available to the Clearing House by the Stock Exchange. The Clearing House gives an obligation report to Brokers and Custodians who are required to settle their money/securities obligations with the specified deadlines, failing which they are required to pay penalties. This obligation report serves as statement of mutual contentment.

Settlement cycle is the period for which equities are traded in Exchange. For Indian stock exchange NSE, the cycle starts on Wednesday and ends on the following Tuesday, and for BSE the cycle starts on Monday and ends on Friday. At the end of this settlement cycle period, the obligations of each broker are calculated and the brokers then settle their respective obligations according to the guidelines, laws and regulations institutionalized by the Clearing agency

Pay-In is a process where by a stock broker and Custodian (in case of Institutional deals) brings in money and/or securities to the Clearing House. This forms the first phase of the settlement activity

Pay-Out is a process where Clearing House pays money or delivers securities to the brokers and Custodians. This is the second phase of the settlement activity

The whole set of money transaction is performed by a bank in the Stock Exchange premises. Exchange appoints this bank to handle the money part of the transaction.

All the above information is mostly in relation to the Indian Stock market. Sometimes in different countries processes may have some deviation from it, but the basic fundamentals behind the whole process remains same. In India, the Pay-in of securities and funds happens on T+ 2 by 11 AM, and Pay-out of securities and funds happen on T+2 by 3 PM.