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Chapter 7: Introduction to Clearing and Settlement System (Part 1)

22 Aug 2026 • NISM-Series-8: Equity Derivatives Mock Tests

Chapter 7: Introduction to Clearing and Settlement System (Part 1)

The clearing and settlement system is the backbone of any derivatives exchange, ensuring that trades are executed seamlessly, obligations are computed accurately, and counterparty default risks are mitigated. This chapter provides a comprehensive overview of how transactions in the Equity Derivatives segment are cleared, settled, and risk-managed in the Indian financial markets.

1. Structure of the Clearing and Settlement System

The Role of the Clearing Corporation / Clearing House

The Clearing Corporation (or Clearing House) is the specialised entity responsible for the clearing and settlement of all trades executed on the Futures & Options (F&O) segment of the exchange.

The Clearing Corporation performs two critical functions:

  1. Legal Counterparty (Novation): The Clearing Corporation acts as a legal counterparty to all trades executed on the F&O segment. Through a process known as novation, the original contract between a buyer and a seller is substituted with two new contracts: one between the buyer and the Clearing Corporation, and another between the seller and the Clearing Corporation.
  2. Financial Guarantee: By becoming the central counterparty (CCP), the Clearing Corporation guarantees the financial settlement of all trades. CCP/novation substantially manages counterparty risk, but saying it completely eliminates risk is too absolute.

Three Pillars of the Clearing and Settlement Process

The entire process managed by the Clearing Corporation comprises three main activities:

  • Clearing: The process of identifying what is owed by whom. It involves computing the net obligations (both funds and contracts) of all clearing members based on the trades executed on the exchange.
  • Settlement: The physical or financial discharge of the computed obligations. It involves the actual transfer of funds (pay-in and pay-out) to settle outstanding accounts.
  • Risk Management: The systematic framework designed to protect the market from defaults. This includes the continuous online monitoring of positions, collection of margins (such as initial, exposure, and premium margins), and enforcement of position limits.

2. Clearing Members: Types and Roles

A Clearing Member (CM) is an entity admitted by the Clearing Corporation to carry out the clearing and settlement of trades and to fulfil the resulting obligations. While trades are required to be cleared and settled through an authorised clearing arrangement, not all market participants have direct clearing rights or membership with the Clearing Corporation.

The F&O segment classifies clearing members into distinct categories based on their operational scope and clearing rights.

Types of Clearing Members

1. Self-Clearing Member (SCM)

A Self-Clearing Member (SCM) is a member of the Clearing Corporation that also has trading rights and is permitted to clear and settle its own trades and the trades of its clients.

  • Scope of Activity: SCMs may clear and settle their own proprietary trades and their clients' trades.

  • Restriction: They cannot clear or settle trades executed by other Trading Members (TMs).

2. Trading Member-cum-Clearing Member (TM-CM)

A Trading Member-cum-Clearing Member (TM-CM) is a member that has both trading rights and clearing rights.

  • Scope of Activity: A TM-CM may clear and settle:

    • Its own proprietary trades.

    • Its clients' trades.

    • Trades executed by other Trading Members that choose to use its clearing services.

    • Trades of Custodial Participants (CPs).

Thus, a TM-CM has a broader clearing role than an SCM.

3. Professional Clearing Member (PCM)

A Professional Clearing Member (PCM) is a Clearing Member that does not have trading rights in the same segment.

  • Scope of Activity: A PCM provides clearing and settlement services for Trading Members that choose to clear through it and may also clear and settle trades for its clients, including eligible institutional clients and Custodial Participants.

  • Typical Entities: Banks and custodians are common examples of entities that may become PCMs.

  • Important Distinction: A PCM is not a Trading Member in the segment for which it acts as a PCM.

4. Custodial Participants (CPs)

A Custodial Participant (CP) is an eligible client/institutional participant that uses the custodial participant facility provided by NSE Clearing.

  • Trading: A CP may execute trades through any Trading Member (TM).

  • Clearing and Settlement: The trades can be cleared and settled through the CP's designated Clearing Member/Custodian.

  • CP Code: The participant must obtain a CP Code through its Clearing Member, and the CP code is identified with the trade.

  • Confirmation: Trades executed for a CP must be confirmed by the CP's Clearing Member within the prescribed time. Until confirmation, the trade is treated as a trade of the Trading Member through whom it was executed, and the settlement responsibility remains with that Trading Member's Clearing Member.

This arrangement allows eligible institutional participants to execute trades through multiple brokers while maintaining their designated clearing and settlement arrangement.

Comparison Table: Types of Clearing Members

Feature Self-Clearing Member (SCM) Trading Member-cum-Clearing Member (TM-CM) Professional Clearing Member (PCM)
Is a Trading Member? Yes Yes No
Clears Own Proprietary Trades? Yes Yes No (N/A)
Clears Own Clients' Trades? Yes Yes No (N/A)
Clears Other Trading Members' Trades? No Yes Yes
Clears Custodial Participants' Trades? No Yes Yes
Typical Entities Retail Brokerage Firms Large Integrated Financial Houses Institutional Banks and Custodians

3. Clearing Banks and the Settlement Schedule

The physical movement of funds requires a robust banking infrastructure and a strict timeline to prevent any operational delays or systemic bottlenecks.

Clearing Banks

All funds settlement under the F&O segment takes place through designated clearing banks.

  • Operational Requirement: To facilitate settlement, every clearing member is required to open and maintain a separate, dedicated bank account with a designated clearing bank of the Clearing Corporation.
  • Purpose: This account is used exclusively for F&O segment settlement activities, including the deposit of margins, the pay-in of funds, and the receipt of pay-out funds.

Settlement Schedule

The derivatives market operates under prescribed processing and settlement timelines to ensure that settlement obligations are met efficiently and that financial and counterparty risks are appropriately managed.

  • T+1 Settlement Basis: Settlement of obligations in the equity derivatives segment is generally carried out on a T+1 working-day basis. This means that applicable settlement obligations arising from trades or positions on day "T" are normally settled on the next working day, "T+1", subject to the settlement mechanism applicable to the contract.

  • Pay-in Deadline: Clearing members having a funds pay-in obligation must ensure that the required clear funds are available in their primary clearing account on or before 9:00 a.m. on the settlement day (T+1). Failure to meet the prescribed settlement obligation may result in settlement default and the applicable consequences under the rules, regulations, and procedures of the Clearing Corporation and the regulator.

Key Takeaways

  1. Novation is Core to Clearing Safety: Through novation, the Clearing Corporation acts as the central counterparty (CCP), becoming the buyer to every seller and the seller to every buyer. This centralisation substantially reduces counterparty risk, although it does not mean that all forms of market or settlement risk are completely eliminated.

  2. Operational Division of Labor: Clearing members perform different clearing functions depending on their membership category. Self-Clearing Members (SCMs) clear their own trades and permitted client trades, while Professional Clearing Members (PCMs) provide clearing services without having trading rights, subject to the applicable rules and regulations.

  3. Strict Timelines Prevent Settlement Risk: The T+1 settlement cycle, together with the prescribed 09:00 a.m. funds pay-in deadline on the settlement day, facilitates timely settlement of obligations and helps contain the build-up of settlement and counterparty risks.

Important Terms to Remember

  • Clearing Corporation: A market infrastructure institution that performs clearing, settlement, and risk-management functions for trades executed on the exchange. It acts as a central counterparty (CCP) for eligible transactions.

  • Central Counterparty (CCP): The role performed by the Clearing Corporation in which it becomes the buyer to every seller and the seller to every buyer, subject to the applicable clearing and settlement framework.

  • Self-Clearing Member (SCM): A clearing member that clears and settles its own trades and the trades of its clients, as permitted under the applicable rules and regulations. It does not clear trades of other Trading Members.

  • Professional Clearing Member (PCM): A clearing member that does not have trading rights and provides clearing and settlement services to Trading Members and other eligible participants, subject to the applicable rules and regulations.

  • Custodial Participant (CP): An institutional investor/client category whose trades are identified and processed through the prescribed custodial-participant mechanism and settled through its designated clearing arrangement.

  • T+1 Settlement: A settlement cycle in which the applicable settlement obligations arising from trades or positions on T (trade) day are normally settled on the next working day (T+1), subject to the specific settlement mechanism applicable to the contract.

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NISM-Series-8: Equity Derivatives Mock Tests — FAQs

The NISM Series 8 Equity Derivatives exam consists of 100 multiple-choice questions. Candidates must complete the exam within 2 hours. The questions test knowledge of derivatives markets, futures, options, trading strategies, clearing mechanisms, and risk management. Practicing a NISM 8 mock test with 100 questions helps simulate the real exam environment.

The passing marks for NISM Series 8 Equity Derivatives certification are 60%. This means candidates must score at least 60 out of 100 marks to pass the exam. Preparing with realistic NISM Equity Derivatives mock tests improves accuracy and helps candidates achieve the required passing score.

Yes, the NISM Series 8 exam has negative marking. For every incorrect answer, 25% of the marks assigned to that question are deducted. Since each question carries 1 mark, 0.25 marks are deducted for wrong answers. Practicing with a NISM 8 mock test helps reduce mistakes and manage negative marking.

The NISM Series 8 Equity Derivatives exam fee is approximately ₹1500 (excluding GST). After passing the exam, the certification remains valid for 3 years. Candidates must renew their certification before expiry through the NISM Continuing Professional Education (CPE) program or by re-taking the exam.

To pass NISM Series 8 in the first attempt, candidates should study the official NISM workbook, understand derivatives concepts clearly, and practice regularly with NISM Equity Derivatives mock tests. Attempting multiple full-length mock tests and chapter-wise quizzes improves accuracy, time management, and exam confidence.

The NISM Series 8 syllabus covers topics related to equity derivatives markets. Key topics include basics of derivatives, futures contracts, options contracts, trading strategies, clearing and settlement, risk management, and regulatory framework. Understanding these concepts through practice questions and mock tests helps candidates prepare effectively.

Yes, PassNISM.in provides free NISM Series 8 mock tests for candidates preparing for the Equity Derivatives certification exam. These tests are designed based on the latest NISM exam pattern and help students practice real exam-style questions, case studies, and time-based tests before attempting the final exam.

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