Clearing and Settlement Process for Equities

Equities are traded over exchange venue through a authorized broker. The broker is a third party who is provided access to the exchange system for buying and selling of equities of listed companies. The below diagram depicts the overall process flow of Equity trading among various participants in the market.

1.1      Trading Process

1)      Customers place an order with his broker for purchase or sale of an equity order.

2)      The equity order will be routed to exchange venues for fulfillment of the order.

3)      Exchange venues confirm the fulfillment of the order.

4)      The confirmation will be sent from Broker to his customer on the complete or partial fulfillment of the order.

5)      The corporations or institutions will then route the order confirmation details to their custodians for settlement and safe keeping.

1.2      Clearing Process

1)      Once the trade is matched at the execution venue, a message will be sent from the exchange venue to the Depository.

2)      The Depository will also send the matching information to Clearing Members for settlements.

3)      The clearing corporation will then perform netting operations and advice the respective broking firms/ custodians to settle their obligations.

1.3      Settlement Process

1)      Once the order is confirmed by the broker, Customer sends out settlement instructions to its bank to pay out cash for its broker and asset allocation instruction to its custodian.

2)      Pay-in of securities: Clearing Corporation advises depository to debit pool account of custodians/Clearing members (Brokers) and credit its (Clearing Corporation’s) account.

3)      Pay-in of funds: Clearing Corporation advises Clearing Banks to debit account of Custodians/Clearing members (Brokers)  and credit its account.

4)      Payout of securities: Clearing Corporation advises depository to credit pool accounts of custodians/Clearing members (Brokers) and debit its account.

5)      Payout of funds: Clearing Corporation advises Clearing Banks to credit account of custodians/ Clearing members (Brokers) and debit its account.

6)      Depository informs Clearing members through Depository Participants about pay-in and pay-out of securities.

7)      Once the custodians receive the instructions, they inform the customer about the changes in their account.

There are various SWIFT message involved in the full Trade , clearing and settlement process between the customers , brokers , clearing corporations and custodians.

1.4      SWIFT messages

Trading Process:

MT 502 – Order to Buy or Sell

MT 509 – Trade status message

MT 515 – Trade Confirmation to customer.

MT 517 – Trade confirmation affirmation by the client.

Clearing process:

MT 540, 541, 542, 543 - Instructions for receipt of financial instruments.

MT 544, 546, 547, 548 – Confirmation for receipt of financial instruments.

Settlement process:

MT 101, 103 – Request for transfer of funds.

MT 202, 204 – Transfer of funds between bank accounts.

MT 587, 588, 589 - Request for transfer Depository accounts.

MT 900, 910 - Advice an account owner of a debit / credit to its account.

MT 970. 971 - Netting statement and Netting balance report.