Overview of the Settlement Mechanism in the Indian Securities Market

Abstract

Trading, clearing, and settlement are three key processes in the stock exchanges. This paper presents an overview of the settlement mechanism of the stock exchanges. The settlement system ensures that the sale proceeds are credited into the seller’s account and securities transferred to the investor or buyer’s account by virtue of their trading in the stock exchanges with lesser settlement risks because settlement involves risks that are associated with the settlement cycle. The settlement cycle is an important factor influencing the liquidity and turnover of the market. Earlier, the settlements were made on the share certificates in paper form and with a longer settlement cycle. Advancement of trading technology simplifies the settlement system on account of trading transactions in the electronic and settlement also through clearing corporations. The specialty of the settlement mechanism is that the settlement of trade is made irrespective of the default by any member and subsequently, the exchange follows up with the defaulting member for recovery of dues to the exchange. The efficiency of the settlement mechanism
ensures liquidity and safety with lesser settlement risk besides improving the efficiency of the stock exchanges/market.