Clearing & Settlement
How trades are cleared and settled in India — the T+1 settlement cycle, what happens when you buy or sell shares, and the role of clearing corporations.
The Settlement Cycle — T+1
When you execute a trade on the stock exchange, the transaction is not completed instantly. There is a defined settlement cycle — the time it takes for the buyer to receive shares and the seller to receive money.
India moved from a T+2 settlement cycle to a T+1 settlement cycle in January 2023, making it one of the fastest settlement markets in the world. Here, "T" refers to the trade day — the day you place and execute your order.
| Event | Day |
|---|---|
| Trade execution (order matched on exchange) | T (Trade Day) |
| Settlement — shares credited to buyer, funds credited to seller | T+1 (Next business day) |
This means if you buy shares on Monday, they will be credited to your demat account by Tuesday. Weekends and exchange holidays are excluded from the count.
The Role of the Clearing Corporation
The clearing corporation is the backbone of the settlement process. It acts as a Central Counterparty (CCP) — meaning it becomes the buyer to every seller and the seller to every buyer. This eliminates counterparty risk and ensures that settlement happens even if one party defaults.
| Clearing Corporation | Associated Exchange |
|---|---|
| NSE Clearing Limited (NCL) | National Stock Exchange (NSE) |
| Indian Clearing Corporation Limited (ICCL) | Bombay Stock Exchange (BSE) |
By stepping in as the CCP, the clearing corporation guarantees every trade. To manage the risk of defaults, it employs multiple layers of protection:
- Margin collection: Brokers must deposit margins upfront for every trade, ensuring skin in the game.
- Mark-to-market (MTM): Open positions are revalued daily, and any losses are collected immediately to prevent risk buildup.
- Settlement guarantee fund (SGF): A pooled fund contributed to by exchanges, clearing corporations, and members — used as a last resort if a member defaults.
- Base minimum capital: Every clearing member must maintain a minimum capital deposit with the clearing corporation at all times.
Types of Settlement
Not all trades settle the same way. The type of settlement depends on whether you intend to take delivery of shares or square off your position within the same day.
| Type | Description |
|---|---|
| Delivery-based settlement | Shares are actually transferred from seller's demat to buyer's demat. This applies to all trades held overnight or longer. Settlement happens on T+1. |
| Intraday (square-off) | Position is opened and closed on the same day. No actual share transfer occurs — only the profit or loss is settled in cash. |
| Auction settlement | If a seller fails to deliver shares by T+1, the exchange conducts an auction to procure the shares from the open market and deliver them to the buyer. The defaulting seller bears any price difference and penalties. |
Margins in the Context of Settlement
Margins are the funds or collateral that a trader must set aside before placing a trade. They act as a security deposit to cover potential losses and ensure orderly settlement. SEBI mandates strict margin requirements to protect the market ecosystem.
| Margin Type | When It Applies |
|---|---|
| VAR + ELM (Value at Risk + Extreme Loss Margin) | Applicable to delivery-based equity trades. VAR covers normal price swings while ELM covers extreme scenarios. Collected upfront before the trade. |
| SPAN + Exposure Margin | Applicable to Futures & Options (F&O) trades. SPAN margin covers the worst-case loss in a day, while exposure margin is an additional buffer. Both are collected upfront. |
| Peak margin | SEBI requires brokers to report the peak (highest) margin used by a client during the day. If the margin utilised exceeds the margin available at any point, a penalty is levied on the broker and passed to the client. |
- India follows a T+1 settlement cycle — shares and funds are settled one business day after the trade.
- The clearing corporation acts as a Central Counterparty (CCP), guaranteeing every trade and eliminating counterparty risk.
- When you buy shares, funds are blocked on Day T and shares arrive in your demat on Day T+1.
- Delivery trades involve actual share transfer; intraday trades settle only the profit or loss in cash.
- Margins (VAR+ELM for equity, SPAN+Exposure for F&O) must be deposited upfront before placing trades.
- If a seller fails to deliver shares, the exchange conducts an auction to procure them from the open market.
This content is for educational purposes only. swingcapital is not a SEBI-registered advisor. Consult a qualified financial advisor before making investment decisions.