Clearing and Settlement Procedure

Topics: Depository Trust & Clearing Corporation, Security, Settlement Pages: 5 (1385 words) Published: April 28, 2013

Most stocks that are sold the “regular way” require delivery of certificates within three business days. On rare occasions a sale may be made as a “cash” transaction, requiring delivery the same day, or as a “seller’s option”, giving the seller the choice of any delivery day within a specified period (typically, no more than 60 days). On other occasions extensions to the three-day limit are granted.

It would be extremely inefficient if every security transaction had to end with a physical transfer of stock certificates from the seller to the buyer. Fortunately, certificates can be almost completely immobilized. The Depository Trust Company (DTC) maintains computerized records of the securities “owned” by its member firms (brokers, banks, and so on). Members’ stock certificates are credited to their accounts at the DTC and the until a member withdraws them. Whenever possible one member will “deliver” securities to another by initiating a simple book-keeping entry in which one account is credited and the other is debited for the shares involved Dividends paid on securities held by the DTC are simply credited to members accounts based on their holdings.

Clearing Process:
The Process of clearing can be defined as :
“The preparation through matching, recording and processing instructions of a transaction for settlement”.

Settlement can be defined as:
“The exchange of cash or assets in return for other assets or cash and transference of the ownership of those assets and cash”.

After a trade has been executed, securities and money must change hands within five business days of the trade date, on what is called settlement date (Saturdays, Sundays, and holidays are excluded). For example, a trade on a Wednesday is settled the following Wednesday. Basically, two tasks are carried out in the clearing process: Trade Comparison and Settlement.

1. Trade Comparisons: The largest clearing corporation is the National Securities Clearing Corporation (NSCC). The first four days of the clearing period are devoted to the trade comparison process and to resolving discrepancies in the transaction information provided by parties to a transaction. Unmatched trades are flagged. Much of this process is automated. 2. Settlement: The second step in the clearing process- the final settlement – is also automated and usually carried out through computer book entries. Certificates are jointly by the NYSE, National Association of Securities Dealers( NASD), and its major participants(brokers and banks). The DTC is regulated by the Securities and Exchange Commission (SEC) and Federal Reserve System.

Screen Based Trading System:
The stock exchanges now provide an on-line fully automated ‘Screen Based Trading System (SBTS)’. The important features of SBTS are : • A member can punch into the computer quantities of securities and the prices at which he likes to transact and transaction is executed as soon as it finds a matching order from counter-party. • It cuts down on time, cost and risk of error, as well as fraud, resulting in improved operational efficiency. • It enables market participants to see the full market on real time, making the market transparent.

Insider Trading :
Insider trading denotes dealing in a company’s securities on the basis of confidential information relating to the company, which is not published and not known to the public. Used to make profit or avoid loss in transactions in securities of the company. ‘Insider Trading’ generally means trading in the shares of a company by the person who are in the management of the company or are close to them .

Traditionally, trades in India were settled by physical delivery. This means that the securities had to physically move from the seller to the seller’s broker, from the seller’s broker to the buyer’s broker (through the clearing house of the exchange or directly), and...
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