What is Clearing Corporation and clearing house.

 Clearing Corporation 

What is Clearing Corporation 

Clearing Corporation/ Clearing House is responsible for clearing and settlement of all  trades executed on the F&O Segment of the Exchange. Clearing Corporation acts as a  legal counterparty to all trades on this segment and also guarantees their financial  settlement. The Clearing and Settlement process comprises of three main activities, viz.,  Clearing, Settlement and Risk Management.  Clearing and settlement activities in the F&O segment are undertaken by Clearing  Corporation with the help of the following entities: Clearing Members and Clearing  Banks.

 *Clearing Members 

There are 3 main type in clearing members.

1. Self clearing member: They clear and settle trades executed by them only, either  on their own account or on account of their clients.  

2. Trading member–cum–clearing member: They clear and settle their own trades  as well as trades of other trading members and custodial participants.
  
 3. Professional clearing member: They clear and settle trades executed by trading  members.  Both trading‐cum‐clearing member and professional clearing member are required to  bring in additional security deposits in respect of every trading member whose trades  they undertake to clear and settle. 

What is Clearing Corporation

  * Clearing Member Eligibility Norms :

1) Net‐worth  of  at  least  Rs.300  lakhs.  The  Net‐worth  requirement  for  a  Clearing  Member who clears and settles only deals executed by him is Rs. 100 lakhs.  

2) Deposit of Rs. 50 lakhs to clearing corporation which forms part of the security  deposit of the Clearing Member. 

3) Additional incremental deposits  of Rs.10 lakhs to clearing corporation for each  additional TM, in case the Clearing Member undertakes to clear and settle deals for  other TMs. 

 * Settlement of Options Contracts on Index or Individual Securities  :

Options contracts have two types of settlements. These are as follows 

1) Daily premium settlement,   
2) Final settlement  

1) Daily Premium Settlement  :

 In options contract, buyer of an option pays premium while seller receives premium.  The  amount  payable  and  receivable  as  premium  are  netted  to  compute  the  net  premium payable or receivable amount for each client for each option contract.   The clearing members who have a premium payable position are required to pay the  premium amount to clearing corporation which in turn passed on to the members who  have a premium receivable position. This is known as daily premium settlement. The  pay‐in  and  pay‐out  of  the  premium  settlement  is  on  T+1  day .  The  premium  payable  amount  and  premium  receivable  amount  are  directly  credited/  debited to the clearing member’s clearing bank account.  

2) Final Exercise Settlement :

 All the in the money stock options contracts shall get automatically exercised on the  expiry day. All the unclosed long/ short positions are automatically assigned to short/  long positions in option contracts with the same series, on the random basis.   Profit/ loss amount for options contract on index and individual securities on final  settlement is credited/debited to the relevant clearing members clearing bank account  on T+1 day i.e. a day after expiry day. Open positions, in option contracts, cease to exist  after their expiration day.  The pay‐in/ pay‐out of funds for a clearing member on a day is the net amount across  settlements and all trading members/ clients, in Future & Option Segment.  

 * What are Clearing Mechanism  :

The first step in clearing process is calculating open positions and obligations of clearing  members. The open positions of a CM is arrived at by aggregating the open positions of  all the trading members (TMs) and all custodial participants (CPs) clearing though him,  in the contracts which they have traded. The open position of a TM is arrived at by  adding up his proprietary open position and clients’ open positions, in the contracts  which they have traded. 
While entering orders on the trading system, TMs identify  orders as either proprietary (Pro) or client (Cli). Proprietary positions are calculated on  net basis (buy‐sell) for each contract and that of clients are arrived at by summing  together net positions of each individual client. A TM’s open position is the sum of  proprietary open position, client open long position and client open short position.  To illustrate, consider a clearing member ‘A’ with trading members clearing through him  ‘PQR’ and ‘XYZ’. 
https://finosutra.blogspot.com/2020/04/what-are-option-contract.html

* What are Regulations in Clearing & Settlement and Risk Management :

 Anybody  interested  in  taking  membership  of  F&O  segment  is  required  to  take  membership of “Capital Market and F&O segment” or “Capital Market, Wholesale Debt  Market  and  F&O  segment”.  A  membership  for  Capital  Markets  and  F&O  segment  acquires a right to execute trades and to clear and settle the trades executed by the  members in these segments. Similarly a membership for Capital Market, Wholesale  Debt Market and F&O segment acquires a right to execute trades and to clear and settle  the trades executed by the members in these segments. An existing member of CM  segment can also take membership of F&O segment. A trading member can also be a  clearing member by meeting additional requirements. 

There can also be only clearing  members.  The initial and exposure margin is payable upfront by Clearing Members. Initial margins  can be paid by members in the form of Cash, Bank Guarantee, Fixed Deposit Receipts  and approved securities.  Clearing members who are clearing and settling for other trading members can specify  the maximum collateral limit towards initial margins, for each trading member and  custodial participant clearing and settling through them.  Such limits can be set up by the clearing member, through the facility provided on the  trading system up to the time specified in this regard. Such collateral limits once set are  applicable to the trading members/custodial participants for that day, unless otherwise  modified by clearing member. 

Non‐fulfilment of either whole or part of the margin obligations will be treated as a  violation of the Rules, Bye‐Laws and Regulations of clearing corporation and will attract  penalty.   In addition clearing corporation may at its discretion and without any further notice to  the clearing member, initiate other disciplinary action, inter‐alia including, withdrawal of  trading facilities and/ or clearing facility, close out of outstanding positions, imposing  penalties,  collecting  appropriate  deposits,  invoking  bank  guarantees/  fixed  deposit  receipts, etc.  Clearing member is required to provide liquid assets which adequately cover various  margins and liquid Net‐worth requirements.

He may deposit liquid assets in the form of  cash, bank guarantees, fixed deposit receipts, approved securities and any other form of  collateral as may be prescribed from time to time. The total liquid assets comprise of at  least 50% of the cash componen and the rest is non cash component. 



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The analogy I have used might not be 100% correct but it’s easy to understand things with a simpler analogy.

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