Functions of DP- Trading and Settlement

Functions of DP- Trading and Settlement (Part 1)

Introduction to Depository Participant (DP): A DP facilitates the transfer of securities from one account to another at the instruction of the account holder.
Role of DP in Trading and Settlement: The DP plays a crucial role in the settlement of securities in off-market transactions and market transactions.
Key Concepts:
- Off-Market Trade: A trade that is cleared and settled without the participation of a clearing member or clearing corporation.
- Market Trade: A trade that is settled through the participation of a Clearing Corporation/ Clearing House (CC/CH).
- Delivery Instruction (DI): A instruction given by the account holder to transfer securities from their account to another account.
- Standing Instructions (SI): Instructions given by the account holder to receive securities into their account without the need for separate receipt instructions.
Process Flow of Settlement:
- Off-Market Transaction: The transferor submits a DI with 'off-market trade' ticked off, and the transferee receives securities into their account automatically if SI were given to the DP.
- Market Transaction: The seller gives an on-market delivery instruction to their DP to transfer securities to their broker's account, and the broker ensures that the pay-in instruction is entered using the CM ID and sufficient balance is there in their CM account.
Important Terms:
- Depository: An organization that holds securities in electronic form and facilitates the transfer of securities.
- Clearing Corporation/ Clearing House (CC/CH): An organization that acts as a intermediary between the buyer and seller in a market trade.
- Block Mechanism: A mechanism introduced by CDSL and NSDL that allows sellers to deliver securities directly to the CC of the exchange.
- One Time Password (OTP): A password sent to the account holder's mobile number or email ID to confirm off-market transfers.
- Beneficiary Details: The details of the buyer (transferee) that need to be added and verified by the seller (transferor) before execution of off-market transfers.

Functions of DP- Trading and Settlement (Part 2)

Account: Securities are transferred from a broker's account to a Clearing Corporation (CC) based on a delivery out instruction.
Settlement Process:
- Securities are moved from the CC to the buying broker's account on pay-out.
- The buying broker gives instructions, and securities move to the buyer's account.
Settlement of Market Transaction: Transfer of securities towards settlement of transactions done on a stock exchange, done by transferring securities from a beneficiary account to a clearing member/early pay-in account.
Unique Client Code (UCC): UCC details are mandatory for settlement of market transactions.
Clearing Member Account: Brokers of stock exchanges that offer settlement through depository are required to open a 'clearing member account', also known as a 'Broker settlement account' or ‘Broker pool account’.
Client Delivery: A client who has sold shares will deliver securities into the CM account of the broker through whom securities were sold.

Important Terms related to Transaction on a Stock Exchange

Market Type: Stock exchanges offer different market segments in which trades can be done, denoted as 'market type' in the depository system.
Settlement Number: Trading periods of each market segment are identified by a settlement number, which has a trade beginning day, trade-ending day, settlement pay-in day, and settlement pay-out day.
Clearing Member: Every broker in a stock exchange participating in the settlement process through depository is required to open a clearing member account, identified with BOIDs / CM BP IDs.
Delivery Deadline: Stock exchanges set a deadline time by which clearing members are expected to deliver securities.

Steps in Pay-in and Pay-out

Pay-in: The process of a broker/trading member submitting securities sold by him on behalf of his client to the CC of a stock exchange.
Pay-out: The process of the CC transferring securities to the broker's CM account for the quantity of securities purchased by them on behalf of their clients.
Steps for Pay-in:
- Clients of brokers who have sold securities move the securities to the broker settlement account before the deadline time.
- Securities made available for pay-in by seller clients and clearing members are informed to the CC in a pay-in file.
Steps for Pay-out:
- The CC credits the buying CM account immediately on pay-out.
- The CM/broker transfers securities from its CM settlement account to the accounts of the buyer.

Direct Delivery and Inter-Settlement Transfers

Direct Delivery: Direct delivery of securities to clients can be effected by the CC, subject to completion of necessary procedures.
Inter-Settlement Transfers: A clearing member can give an instruction to move securities from one bucket with a different market type-settlement number combination to another bucket from where pay-in is to be effected.

Tracking of Securities and Automatic Delivery-out

Tracking of Securities: A CM is required to track the securities it has received for pay-in, which can be done through clients, DP, or internet facilities provided by depositories.
Automatic Delivery-out: In NSDL, delivery-out instructions for moving securities from CM Pool Account to CM Delivery Account can be generated automatically by the respective Clearing Corporations based on the net delivery obligations of its Clearing Members.
Early Pay-in Facility: Used to avail margin exemptions and other applicable benefits, including Buy-back and Tender Offer transfers, where securities for early pay-in have to be delivered to the CC's early pay-in account.
Normal Pay-in Facility: Can be used by a CM or the seller BO to deliver securities to the CC of the stock exchange by giving normal pay-in instruction to the DP.

Functions of DP- Trading and Settlement (Part 3)

Pay-in Instructions: The normal pay-in instructions are entered by the DP, to the extent of quantity specified (or part) in the normal pay-in instruction. The accounts of the CM / BO are accordingly debited during pay-out time.
Auto Pay-in: A facility available to BSE-CMs on written request to CC, where the CM will not be required to give any pay-in instructions to his DP and the securities will be automatically considered for pay-in.
Inter-settlement Instructions: Clearing Members will be required to give Inter-settlement Instructions to the Participants for securities lying within a same CM account but in different settlement pocket.
CM Settlement to CM Settlement Instructions: The CM may give instructions to its DP to debit its settlement / Pool account and credit the settlement account of another CM in a prescribed format.
Inter-depository Transfer: Transfer of securities from an account in one depository to an account in another depository, which can be done only for securities that are available for dematerialisation on both the depositories.

Key Concepts

Interoperability: Under Interoperability, a Clearing Member (CM) may choose to have a preferred Clearing Corporations (CC), where trades executed on multiple exchanges can be consolidated into a single CC.
Delivery Versus Payment (DvP) Agent: The interoperable CCs appoints a DvP agent, who will be responsible for settlement of obligations.
Settlement Process: The settlement process involves the pay-in process, submission of pay-out file, and transfer of securities between CCs and DvP agents.

Mutual Fund Units

Subscription (Purchase): Mutual Fund units purchased by an investor through the CM is routed through the settlement cycle of the stock exchange.
Redemption (Repurchase): In case of Redemption of MF units, the Investor shall place an order through eligible Clearing Member (CM) on Stock Exchange Order Entry platform.
Repurchase / Redemption through Depository Participant: BO can also redeem or offer for repurchase the MF units that are available in electronic form in his demat account directly through the DP without going through the stock exchange mechanism.

Handling of Clients’ Securities

Segregation of Securities: The Securities Contracts (Regulation) Act, 1956 and SEBI (Stock-Brokers) Regulations, 1992 specifies that the stock broker shall segregate securities or moneys of the client and shall not use it for self or for its other clients.
Transfer of Securities: All TM/CM are required to transfer the clients securities received in pay-out to clients demat account within one working day.

Functions of DP- Trading and Settlement (Part 4)

Pledge Creation: In case of unpaid securities, the Trading Member/Clearing Member (TM/CM) creates an auto-pledge in favor of a separate account titled "client unpaid securities pledgee account".
Communication: TM/CM informs the client about their funds obligation and the right to sell securities in case of non-payment.
Pledge Release: If the client fulfills their funds obligation within five trading days, TM/CM releases the pledge, making the securities available to the client as free balance.
Securities Disposal: If the client fails to fulfill their obligation, TM/CM disposes of the securities in the market within five trading days, giving an intimation to the client one trading day before the sale.
Unique Client Code (UCC): The unpaid securities are sold in the market with the client's UCC, and the profit/loss is transferred to/adjusted from the client's account.

Government of India Notification

Indian Stamp (Collection of Stamp-Duty through Stock Exchanges, Clearing Corporations and Depositories) Rules, 2019: The Central Government amended the Indian Stamp Act, 1899, to facilitate ease of doing business and uniformity in stamp duty collection.
Stamp Duty Collection: Stamp duty is collected before execution of off-market transfers involving securities in the depository system, based on the "Consideration Amount" captured in the depository system.
Rate of Stamp Duty: The rate of stamp duty is governed by the provisions of Schedule I of the Principal Act, with three categories defined for securities: 'Debenture', 'Government Securities', and 'Securities other than Debenture'.

Review Questions

Question 1: The correct answer is (a) Off Market.
Question 2: The correct answer is (a) True.
Question 3: The correct answer is (b) Pay-out breakup.
Question 4: The correct answer is (d) Clearing Member.