Tech, ExplainedFintech
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Clearing and settlement

What happens after the trade is matched.

BEFORE ITAFTER ITClearing and settlementThe Depository Trust & Clearing Corp (DTCC)CME GroupICELSEG (London Stock Exchange Group)PARTClearing house+PARTDepository+COVERSNettingGuaranteeMarginT+1Matching enginesends matchedtradesElectronic bond tradingsendsbond tradessends settledtradesPost-trade processingsendsmargin dueOrder management system(OMS) for brokersCONCEPTS IT USEST+1 settlementBEFORE ITAFTER ITClearing and settlementThe Depository Trust & Clearing Corp (DTCC)CME GroupICELSEG (London Stock Exchange Group)PARTClearing house+PARTDepository+COVERSNettingGuaranteeMarginT+1Matching enginesends matchedtradesElectronicbond tradingsendsbond tradessends settledtradesPost-tradeprocessingsendsmargin dueOrder managementsystem (OMS)for brokersCONCEPTS IT USEST+1 settlementBEFORE ITMatching engine↓ sends matched tradesElectronic bond trading↓ sends bond tradesClearing and settlementThe Depository Trust & Clearing Corp (DTCC)CME GroupICELSEG (London Stock Exchange Group)Clearing house+Depository+NettingGuaranteeMarginT+1AFTER IT↓ sends settled tradesPost-trade processing↓ sends margin dueOrder management system(OMS) for brokersCONCEPTS IT USEST+1 settlement
Clearing and settlement takes matched trades from the share and bond markets, nets and guarantees them, moves the shares and the money by the next day, and sends the results to brokers and post-trade processing.
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Clearing and settlement is the work that happens after a trade is matched. Clearing works out what each side owes and guarantees that it will be paid. Settlement actually moves the shares and the money. Together, these steps are often called the post-trade.

Clearing is done by a clearing house. It steps in between the buyer and the seller of every trade, and guarantees that both will be paid. During the day, it also adds up all the trades of each broker. This adding up is called netting. Settlement is done by a depository, which moves shares from one demat account to another, and by banks, which move the money. In India, both steps finish by the next working day. This is called T+1 settlement.

Here is why netting matters. Take, for example, a broker whose clients buy 10,000 shares of one company during the day, and sell 7,000 shares of the same company. Without netting, there would be 17,000 shares to deliver in two directions. With netting, the clearing house works out a single figure: the broker must receive 3,000 shares and pay for them. Across thousands of brokers and thousands of shares, netting cuts the amount that must move by a very large amount.

The clearing house also protects the market from a broker that fails. It collects margin, a deposit, from every broker during the day, based on how risky that broker's open trades are. At the end of the day, it sends each broker a file of what it owes. Brokers' order management systems use these figures for the next day's checks. The settled trades then go to each firm's post-trade processing, where records are updated and checked.

The systems that do this work handle very large values. In America, a single organisation clears and settles almost every share trade and many bond trades, worth trillions of dollars a day. Much of its software is built at its centres in Hyderabad and Chennai.

Shorter settlement means more of this work must run in real time. India is already testing settlement on the same day. Real-world asset tokenisation goes further: shares or bonds are recorded as tokens on a blockchain, and the trade can settle instantly.

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