Clearing corporation
Also called: Central counterparty, CCP · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A clearing corporation clears and settles trades on an exchange. Clearing means working out who owes what. Settlement means actually handing over the shares and the money. The clearing corporation becomes the buyer to every seller and the seller to every buyer. This is called novation. Because of it, a trader does not need to worry that the person on the other side will fail to pay or deliver (counterparty risk). A settlement guarantee fund backs these promises. This is why it is also called a central counterparty (CCP).
Example
NSE Clearing clears trades on NSE, and ICCL does the same for BSE. If a buyer on NSE fails to pay, NSE Clearing still makes sure the seller receives the money.
Don't confuse with
- Depository: NSDL or CDSL holds shares electronically in demat accounts and transfers ownership. The clearing corporation guarantees and settles the trade. The depository records who owns what.
Related concepts
- Secondary market
- Depository
- Demat account
- T+1 settlement
- Algorithmic trading
- Circuit breaker
- Sensex
- Nifty 50
- Market capitalisation
- Free float