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Chapter 7: Introduction to Clearing and Settlement System (Part 2)

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

Chapter 7: Introduction to Clearing and Settlement System (Part 2)

Following our analysis of the organizational structure and various clearing participants, this second part focuses on the practical execution of clearing and settlement, detailing the specific daily and final settlement processes, and the risk management frameworks designed to keep the derivatives market secure.

1. Daily and Final Settlement Mechanisms

Settlement is the actual implementation of the clearing results, representing the physical or financial fulfillment of trade obligations. In the Indian equity derivatives segment, contracts undergo two distinct stages of settlement: Daily Mark-to-Market (MTM) Settlement and Final Settlement.

Mark-to-Market (MTM) Settlement

Mark-to-Market (MTM) settlement is the process of settling the daily profit or loss arising from changes in the settlement value of futures positions.

  • Daily Settlement: Open futures positions are marked to the daily settlement price at the end of each trading day.

  • Settlement: The resulting MTM profit or loss is settled through the Clearing Members. Under the normal mechanism, the pay-in and pay-out of daily MTM settlement take place on T+1.

  • Position Reset: After daily settlement, open futures positions are reset to the daily settlement price.

  • Risk Management: Daily MTM settlement ensures that losses are collected regularly rather than accumulating until contract expiry.

  • T+0 Option: Clearing Members may opt to pay daily MTM settlement on a T+0 basis, subject to the applicable NSE Clearing conditions. The MTM payout continues on T+1.

Final Settlement of Futures Contracts

On expiry, outstanding futures positions are marked to the final settlement price prescribed for the relevant futures contract. The resulting final profit or loss is settled in cash through the Clearing Member's clearing bank account.

The final settlement amount is debited or credited on T+1, where T is the expiry day, and the open futures positions cease to exist after expiry.

Settlement of Options Contracts

Options involve premium settlement during the life of the contract and final exercise settlement at expiry.

1. Premium Settlement

When an option is traded, the buyer pays a premium and the seller/writer receives the premium.

  • Clearing Members are responsible for collecting and settling the premium amounts from the Trading Members and clients clearing through them.

  • The pay-in and pay-out of option premium are generally conducted on T+1, where T is the trade day.

  • The applicable premium amounts are debited from or credited to the Clearing Member's clearing bank account.

2. Final Exercise Settlement

For options that are in-the-money at expiry, exercise and assignment are carried out according to the applicable rules.

  • Exercise is automatic for the applicable index and individual-security option contracts.

  • Exercise positions are assigned to Clearing Members at the client level.

  • The resulting exercise settlement is cash settled.

  • The final settlement amount is debited or credited to the relevant Clearing Member's clearing bank account on T+1 after expiry.

Comparison Table: Daily vs. Final Settlement

Feature Daily Mark-to-Market (MTM) Final Settlement
Applicability Ongoing daily for all open positions. Executed only on the expiration day of the contract.
Price Benchmark Daily closing price of the derivative contract. Final closing price of the underlying cash asset on expiry.
Timing of Funds Flow Adjusted daily; settled on the next trading day (T+1). Processed on the next working day after expiry (T+1).
Impact on Position Position remains open and active. Position is closed out and ceases to exist.

 

2. Risk Management and the SPAN System

Because the derivatives market is highly leveraged, a robust risk containment mechanism is vital. The Indian securities market uses a sophisticated risk management framework designed to protect the system against large-scale defaults.

SPAN Margin System:

SPAN (Standard Portfolio Analysis of Risk) is a portfolio-based margining system used by NSE Clearing for the Futures & Options segment.

SPAN evaluates the risk of a member's overall portfolio under different market scenarios and is used to determine the applicable initial margin requirements.

The objective is to assess the potential loss of the portfolio under adverse market conditions rather than evaluating each position entirely in isolation.

3.Types of Margin Requirements

  • Initial Margin: Margin collected upfront from Clearing Members against their open positions. NSE Clearing computes the applicable margin requirements using its SPAN-based risk-management framework. Initial margin requirements are generally based on 99% Value at Risk (VaR) over a one-day time horizon, subject to the applicable methodology.

  • Premium: The option buyer is required to pay the option premium, which is settled through the Clearing Corporation.

  • Assignment Margin: Margin applicable to assigned option positions to cover the settlement obligations arising from exercise and assignment.

  • Exposure Margin: An additional margin requirement over and above the applicable initial margin to provide an additional risk buffer.

  • Client Margins: Clearing Members and Trading Members are required to collect the applicable margins from their clients in accordance with the applicable regulatory requirements.

4. Liquidity and Net Worth Rules for Clearing Members

Clearing Members are required to maintain adequate liquid assets and financial resources to meet margin obligations and settlement commitments. NSE Clearing's risk-management framework requires liquid assets to cover applicable margin and liquid-net-worth requirements.

Liquid Assets Structure

Liquid Assets are eligible cash and collateral maintained by Clearing Members with the Clearing Corporation to meet margin and other financial obligations.

Clearing Members may provide liquid assets in forms such as cash, bank guarantees, fixed deposit receipts, approved securities and other collateral permitted by the Clearing Corporation from time to time.

  • Cash Component: At least 50% of the Effective Deposits should be in the form of the prescribed cash component. For F&O margin deposits, NSE Clearing includes cash, bank guarantees, fixed deposit receipts, Treasury Bills and dated Government Securities in the cash component.

  • Non-Cash Component: The remaining portion may consist of eligible non-cash collateral, such as approved securities, subject to the applicable limits, eligibility criteria and haircuts prescribed by NSE Clearing.

  • Valuation Haircuts: Securities are valued after applying the applicable haircut prescribed by NSE Clearing from time to time. Therefore, fixed statements such as "15% for equity securities" and "10% for debt securities" should not be treated as universal current rules.

Liquid Net-Worth and Capital Requirements

  • Liquid Net-Worth Formula: For the current NSE Clearing equity-derivatives framework, liquid net worth is calculated by reducing the applicable initial margin and extreme loss margin from the Effective Deposits.

    Liquid Net-Worth = Effective Deposits − Initial Margin − Extreme Loss Margin

  • Minimum Liquid Net-Worth: A Clearing Member must maintain liquid net worth of at least ₹50 lakh at all times.

  • Minimum Liquid Net-Worth Composition: NSE Clearing's liquid-assets framework specifies that the ₹50 lakh minimum liquid net-worth requirement is maintained as:

    • ₹25 lakh in cash, and

    • ₹25 lakh in any one or combination of eligible collateral forms accepted towards liquid assets.

  • Additional Deposit for Trading Members: A Clearing Member that clears and settles trades for other Trading Members must maintain an additional ₹10 lakh deposit for each such Trading Member, comprising ₹2 lakh in cash and ₹8 lakh in eligible collateral, subject to the applicable NSE Clearing requirements.

  • Net-Worth Requirement for Membership: The minimum net-worth requirement for membership should be stated according to the current SEBI/NSE Clearing membership-specific requirements, rather than using a blanket ₹3 crore figure. NSE Clearing's current membership page, updated 5 August 2026, specifically refers members to the applicable SEBI net-worth framework and the latest NSE Clearing circulars.

Key Takeaways

  1. Daily MTM Controls Accumulation of Losses: Futures positions are marked to the daily settlement price and the resulting profit or loss is settled regularly. Under the normal mechanism, daily MTM settlement is on T+1, while Clearing Members may opt for T+0 payment subject to applicable conditions.

  2. Final Settlement Closes the Contract: On expiry, outstanding futures and applicable option obligations are settled according to the prescribed final settlement mechanism, and the relevant open positions cease to exist after expiry.

  3. SPAN Supports Risk-Based Margining: NSE Clearing uses the SPAN-based portfolio risk-management framework to determine applicable margin requirements for F&O positions.

  4. Margins Provide Risk Protection: Initial and other applicable margins are collected to provide protection against adverse price movements and potential settlement obligations.

  5. Clearing Members Carry Settlement Responsibilities: Clearing Members calculate/receive obligations from the participants clearing through them and fulfil the resulting settlement obligations with the Clearing Corporation.

Important Terms to Remember

  • Mark-to-Market (MTM): The daily settlement process through which the profit or loss arising from changes in the settlement value of futures positions is calculated and settled. Under the normal mechanism, daily MTM settlement is on T+1, while eligible Clearing Members may opt for T+0 payment subject to applicable conditions.

  • Option Premium Settlement: The settlement of option premium obligations between the premium-paying option buyers and premium-receiving option sellers through the Clearing Corporation. The applicable premium settlement is generally carried out on T+1.

  • SPAN (Standard Portfolio Analysis of Risk): A portfolio-based risk-management and margining system used by NSE Clearing to assess the potential risk of a portfolio under different market scenarios and determine applicable margin requirements.

  • Exposure Margin: An additional margin requirement collected over and above the applicable initial margin to provide an additional risk buffer against adverse market movements.

  • Liquid Net-Worth: The financial resource available to a Clearing Member after deducting the applicable initial margin and extreme loss margin from Effective Deposits. A Clearing Member is required to maintain the prescribed minimum liquid net-worth, currently ₹50 lakh under the applicable NSE Clearing F&O framework.

  • Haircut: A prescribed percentage reduction applied to the value of eligible collateral securities when determining their collateral value. The applicable haircut varies according to the type and eligibility of the security and is prescribed by the Clearing Corporation from time to time.

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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.

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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.

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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.

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