Definition
Clearing Corporation
A clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
In India, NSE Clearing (NSCCL) and Indian Clearing Corporation (ICCL) clear trades for the NSE and BSE respectively. Through novation, the clearing corporation interposes itself as the central counterparty, so that members face the clearing corporation rather than each other, eliminating bilateral counterparty risk.
The clearing corporation performs netting of obligations, collects margins, manages the settlement guarantee fund and runs auctions for short deliveries. Its central-counterparty role is the backbone of settlement integrity, ensuring that a default by one member does not cascade through the system.
Related terms
- Central Counterparty (CCP)A central counterparty is an institution that interposes itself between the two sides of a trade, becoming buyer to the seller and seller to the buyer, thereby guaranteeing performance and concentrating risk management.
- NovationNovation is the legal process by which the clearing corporation replaces a single trade between two members with two new trades, becoming the counterparty to each side and assuming the settlement obligation.
- NettingNetting is the offsetting of a member's buy and sell obligations in the same security and settlement so that only the net quantity of shares and net amount of money change hands.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.