What is Clearing Corporation in Stock Market

What is Clearing Corporation?

A clearing corporation is a financial intermediary associated with a stock exchange to handle the confirmation, settlement, and delivery of transactions.

Like a depository has the responsibility for ensuring the transfer of securities from the seller’s demat account to the buyer’s account. A clearing corporation ensures that the buyer pays the money to the seller for those securities.

A clearing corporation is also known as a ‘clearinghouse’ and ‘clearing firm’.

Clearing corporations in India

As you’ve read that the clearinghouse is associated with a stock exchange and in India, we’ve 2 major stock exchanges which are BSE and NSE. So, in this way, the Indian stock market has 2 clearing corporations which are ICCl and NSE Clearing Ltd.

1. ICCL

  • ICCL stands for ‘Indian Clearing Corporation Limited’.
  • It is the Clearinghouse of BSE.
  • Established in 2007
  • ICCL is located in Mumbai.

2. NSE Clearing Ltd.

  • Formerly it was known as “NSCCL” (National Securities Clearing Corporation Limited).
  • NSE Clearing ltd. is the clearinghouse of NSE.
  • Established in 1995
  • It is also located in Mumbai.

What is CCIL

The Clearing Corporation of India Ltd. (CCIL) was set up in April 2001 to provide guaranteed clearing and settlement functions for transactions in the stock market, money market, forex market and derivatives markets.

We’re here to know about ‘what is clearing corporation in the stock market?’ So, let us discuss how CCIL conducts its operations in the stock market?

Do you know what is primary and secondary markets? Whenever the companies need equity funds, they raise the capital from the public by issuing shares in the primary market and after raising the funding the shares of the company get listed on the stock exchange and are available for trading in the secondary market.

The major trading takes place in the secondary market where the investors trade through the stock exchanges. And to handle the trading, clearing and settlement of transactions in the secondary market; CCIL was established in 2001.

Clearing and Settlement

Clearing and settlement are 2 different processes that a clearing corporation performs.

What is Clearing in Stock Market

The clearing is a process in which the clearing corporation acts as an intermediary between the buyer & the seller and it also assumes the role of the buyer and seller to reconcile the transactions that occur in the trade.

Clearing includes all activities such as reporting, tax handling and risk management from the first seconds of the trade opening to the last stage when the trade is settled.

What is Settlement in Trading

As the clearing ends, settlement begins where the settlement agency receives the shares from the seller and cash from the buyers and then the agency gives the shares to the buyer and cash to the seller.

The time for this whole settlement i.e. settlement period depends on the type of securities to be traded. For example, the settlement period is ‘T+2’ for stocks i.e. trade date plus 2 working days.

Conclusion

Before the incorporation of the Clearing Corporation, trades were settled by ‘Account Period Settlement’, which took approximately one week to receive delivery of shares.

The introduction of clearing corporations has ensured market efficiency, transparency, and liquidity and also helped in reducing settlement and operational risk, saving on settlement costs.

The biggest advantage of Clearing Corporation is that now trades can be settled within 3 working days, which used to take a week initially.

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