CLEARING AND Financial

Derivatives
SETTLEMENT
 CLEARING AND SETTLEMENT

National Securities Clearing Corporation Limited (NSCCL) is the

clearing and settlement agency for all deals executed on the
Derivatives (Futures & Options) segment. was incorporated in
August 1995

NSCCL acts as legal counter-party to all deals on NSE's F&O

segment and guarantees settlement.

A Clearing Member (CM) of NSCCL has the responsibility of

clearing and settlement of all deals executed by Trading
Members(TM) on NSE, who clear and settle such deals through
them.

Clearing Member performs following functions :-

1. Clearing
2. Settlement
3. Risk Management
 OBJECTIVES

to bring and sustain confidence in clearing and settlement of

securities;
to promote and maintain, short and consistent settlement cycles;
to provide counter-party risk guarantee, and
to operate a tight risk containment system.
NSCCL commenced clearing operations in April 1996.
CLEARING ENTITIES
 CLEARING ENTITIES

Clearing and settlement activities in the Currency

Derivatives segment are undertaken by a Clearing
Corporation with the help of the following entities:

1. Clearing members
2. Clearing banks
 CLEARING MEMBERS

Primarily, the CM performs the following functions:

Clearing - Computing obligations of all his TM's i.e. determining
positions to settle.

Settlement - Performing actual settlement. Only funds settlement

is allowed at present in Index as well as Stock futures and
options contracts

Risk Management - Setting position limits based on upfront

deposits / margins for each TM and monitoring positions on a
continuous basis.
 T YPES OF CLEARING MEMBERS

Self-clearing Members(SCM): Trading-cum-clearing member,

clear and settle their own trades as well as trades of other
trading members (TMs).

Professional Clearing Members Professional clearing

members (PCM)- clear and settle trades executed by TMs.

Trading cum Clearing Members(PCM ): The members clearing

their own trades and trades of others,.
 Types of Clearing Members

Trading Member Clearing Member (TM-CM)

A Clearing Member who is also a TM. Such CMs may clear and settle their own
proprietary trades, their clients trades as well as trades of other TMs

Professional Clearing Member (PCM)

A CM who is not a TM. Typically banks or custodians could become a PCM and clear
and settle for TMs.

Self Clearing Member (SCM)

A Clearing Member who is also a TM. Such CMs may clear and settle only their own
proprietary trades and their clients trades but cannot clear and settle trades of other
TMs.
 ELIGIBILITY OF CLEARING MEMBER

Net worth of at least Rs. 300 lakhs.

Deposit of Rs. 50 lakhs to NSCCL which forms part of the

security deposit of the CM

Additional incremental deposits of Rs.10 lakhs to NSCCL for

each additional TM in case the CM undertakes to clear and
settle deals for other TMs.
 CLEARING BANKS

Funds settlement - clearing banks.

For settlement - All clearing members are required to open a

separate bank account with the Clearing Corporation designated
clearing bank for F &O segment.

The clearing members keep a margin amount in these bank

accounts.
 There are 13 clearing banks of NSE, viz.,
Axis Bank Ltd,
Bank of India Ltd.,
Canara Bank Ltd.,
Citibank N.A ,
HSBC Ltd.,
HDFC Bank Ltd.,
ICICI Bank Ltd
IDBI Bank Ltd.,
Indusind Bank Ltd.,
Kotak Mahindra Bank,
Standard Chartered Bank,
State Bank of India and Union Bank of India
CLEARING MECHANISM
 CLEARING MECHANISM

Define
Clearing can be defined as the procedure by which an
organization acts as an intermediary and assumes the role of
both buyer and seller for transactions in order to reconcile
orders between transacting parties.
 SETTLEMENT

NSCCL clears and settles trades as per the well-defined

settlement cycles
 NEED FOR DERIVATIVE MARKETS IN INDIA

India being the highest producer in maximum number of

commodities and ranks amongst the top-5 producers in most of
the commodities and additionally being a major consumer of
bullion and energy products, it is vital to know why commodity
derivatives are essential to play a role in risk management as the
prices of commodities, metals, shares and currencies oscillate
over period of time. The possibility, if adverse price changes in
future created risk for businesses. Derivatives are used to
diminish or eradicate price risk rising from unexpected price
changes. A derivative is a financial contract whose price depends
on, or is derived from, the price of another asset.
 Derivative was suspected of creating too much speculation that
would be to the detriment of the healthy growth of the markets
and the farmers. Such suspicious might normally arise due to a
misunderstanding of the characteristics and role of derivatives
product. The Two important derivatives are futures and options.
 COMMODIT Y DERIVATIVES AND
REGUALTIONS
THE NEED FOR REGULATION-arises on account of the fact that the
benefits of futures markets accrue in competitive conditions. In
the absence of regulation, unscrupulous participants could use
these leveraged contracts for manipulating prices. This could
have undesirable influence on the spot prices, thereby af fecting
interests of society at large. Regulation is also needed to ensure
that the market has appropriate risk management system. In the
absence of such system, a major default could create a chain
reaction. The resultant- financial crisis in a futures market could
create systematic risk. Regulation is also needed to ensure
fairness and transparency in trading, clearing settlement and
management of the exchange so as to protect and promote the
interest of various stakeholders, particularly non-member users
of the market.
REGULATIONS OF DERIVATIVES MARKET IN
INDIA
The Exchanges are regulated by SEBI,RBI and
Government. SEBI created a 24 member committee
under the guidance of Dr. L.C. Gupta for a effective
regulatory framework for derivatives trading in India.
The recommendation of this committee by SEBI was
introduced on 11th May 1998 and sanctioned the
segment introduction of derivatives trading in India
commencing with stock index future. The necessities in
Securities Contracts (Regulation) Act, 1956 SC(R)A and
regulatory frame work established there under
supervise over trading in securities and modification to
include derivatives within the frame work of that Act.
DR. L.C. GUPTA L CHAMPION OF MARKET
REFORM.
 DERIVATIVE REGULATION FROM DR. L.C
GUPTA COMMITTEE RECOMMENDATION
Any exchange in India, interested to start derivative trading have
to fulfill the eligible criteria and apply SEBI for the purpose of
approval for derivative trading under section 4 of SC(R)A 1956.
Derivative trading or clearing member should have a limit to
maximum of 40% of total member council and the particular
exchange should have separate governing council
The exchange should have to obtain prior approval of SEBI before
starting of trading in any derivative contract or product and
would have to regulate the sales practices of its members.
The exchange has a limit up to 50 members.
The member of an active segment would not become the member
of derivative segment automatically. Every existing segment
member should take approval of SEBI and also fulfill L.C Gupta
committee criteria to start derivative trading
 Clearing and any settlement of derivative contract or trade
should be undertaken by SEBI approved clearing corporation or
houses which fulfills the criteria of L. C. Gupta committee and
also take approval for SEBI to start clearing and settlement
process.
Every brokers, dealers and clearing members of derivative
market should take approval along with registration in SEBI to
start new derivative product.
Least amount of net-worth of clearing member of derivative
clearing corporation or houses shall be Rs. 3 Cr.
The maximum contract value shall not exceed Rs. 2 lakh;
Exchange should have submitted details of the futures contract
they intend to introduce
 The Initial margins, obligations and introductions limit ought be
linked to capital adequacy and marginal demands related to risk
of loss which will be approved by SEBI time to time on position.
L.C. Gupta committee emphasized on know your customer rule
and precondition that every client shall be registered with the
derivatives broker.
The members of derivative segment required to be aware of their
client contract which generate alertness to customer or client
about derivative losses
Every trading member must be qualified as per SEBI requirement
and also cleared certification program approved by SEBI.
 TRADING OF DERIVATIVES

derivatives can be traded separate exchange or in existing

exchange having cash trading in order to fulfilling eligibility
conditions laid by committees
(i)Derivatives trading should take place through online screen
based trading systems.
ii)The clearing of the derivatives market should be done by an
independent clearing corporations
iii)The exchange must have online surveillance facility
iv)The exchange should have at least 50 members to start
derivatives trading
v)A separate segment should be created by dif ferent members, if
derivatives are traded in existing exchange systems
vi)The derivatives market should have a separate governing council
which does not include clearing house members or their
representatives. if a Broker becomes Chairman of the governing
council, then he cannot deal during his tenure as chairman
 Viii)the exchange should have arbitration and investor grievances
redressal mechanism to solve the problems of investors
Ix)the exchange should have adequate inspection facility
X)No TM or CM should be allowed to be in governing council of
derivatives market and cash market simultaneously.
 REGULATORY RESPONSIBILIT Y

A)Exchange level regulations

i)Derivative exchange will have to act as self regulator and should
be competent enough to solve the problems on its own
ii)SEBI will act as regulator of last resort. Thus exchange level rules
and regulations must be very clear
ii)Rules for derivative trading are stricter than other trading and
every Trader /Member Inspected annually
B)SEBI Rules and Regulations
i) derivative exchange will have to get prior approval of SEBI,if
there is any change in rules, bye laws and regulations of
derivatives exchange
ii)SEBI need no involve in formulating of rules but they can
evaluate and if there is any deficiency then they can suggest
improvements
 SEBI should establish derivative cell, Advisory council and
economic research wing to deal with derivative trading and
a)permitting desirable flexibility b) maximising regulatory
ef fectiveness and c)minimizing regulatory cost

The committee suggest that before starting trading in a

derivatives product, the derivative exchange should submit the
proposal for SEBIs Approval
(a)full details of the proposed derivatives contract to be traded
(b)the economic purpose it is intended to serve
its likely contribution to market developments and
(D) the safeguards incorporated to ensure protection of
investors/clients and fair trading.SEBI of ficers should be in a
position to provide ef fective supervision and constructive
guidance in this regard
RECOMMENDATIONS
THANK YOU