NISM Series XI · Unit 7 of 9 · about 10% of the paper
Clearing and settlement: NISM Series XI notes and practice questions
How a trade turns into delivery and payment.
What to know in Unit 7
- Rolling settlement and pay-in/pay-out.
- Clearing corporation role.
- Shortages and auctions.
Key terms, examples and exam traps
Rolling settlement
In rolling settlement, trades done each day are settled after a fixed number of days, now T+1 for equity.
Example. A trade on Monday is settled on Tuesday.
Exam trap. This statement is false: Equity settlement takes place weekly.
Pay-in and pay-out
Pay-in is the delivery of securities and funds to the clearing corporation, and pay-out is the release to the buyer and seller.
Example. Sellers deliver shares and buyers pay money, and then each receives what is due.
Exam trap. This statement is false: Pay-out is the payment to the clearing corporation.
Clearing member
A clearing member settles trades with the clearing corporation for itself or others.
Example. An entity that deals with the clearing corporation for trades.
Exam trap. This statement is false: A clearing member advises clients on shares.
Novation
Novation substitutes the clearing corporation as counterparty to each trade, guaranteeing settlement.
Example. After the trade, the buyer and seller each deal with the clearing corporation.
Exam trap. This statement is false: Novation ends the trade.
Settlement guarantee fund
The settlement guarantee fund is a pool maintained by the clearing corporation to complete settlement when a member defaults.
Example. A fund exists to complete settlements if a broker fails.
Exam trap. This statement is false: The fund pays profits to clients.
Delivery instruction
A client instructs the depository participant to transfer shares for settlement using a delivery instruction slip or electronic authorisation.
Example. A seller authorises transfer of shares to settle her sale.
Exam trap. This statement is false: Delivery instructions are used to place orders.
Short delivery
If the seller fails to deliver, the shortage is settled through an auction or closed out at a set price.
Example. The seller does not deliver, and the exchange auctions the shares.
Exam trap. This statement is false: A short delivery is cancelled with no consequences.
Close-out
Close-out is the compulsory settlement of a position that cannot be delivered, at a price determined by the exchange.
Example. A seller who cannot deliver sees the trade closed out at a specified price.
Exam trap. This statement is false: Close-out is the buyer's penalty.
Funds settlement
Funds are settled through clearing banks, with the clearing corporation debiting and crediting member accounts.
Example. The exchange moves funds between members' bank accounts.
Exam trap. This statement is false: Funds are settled only in cash at the broker's office.
Settlement calendar
The exchange publishes a settlement calendar, including holidays, to determine pay-in and pay-out dates.
Example. A trade near a holiday settles after the holiday.
Exam trap. This statement is false: Settlement dates are the same irrespective of holidays.
Corporate action adjustments
Settlement of trades around corporate actions follows the ex-date, with the buyer entitled only if bought before the ex-date.
Example. A buyer on the ex-date does not get the dividend.
Exam trap. This statement is false: A buyer on the ex-date is entitled to the dividend.
Settlement default
If a member defaults, the clearing corporation uses the member's deposits and other resources to complete obligations.
Example. The member's margin is used to settle.
Exam trap. This statement is false: The clients of the defaulting member always lose everything.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? The settlement guarantee fund is a pool maintained by the clearing corporation to complete settlement when a member defaults.
- Unique Client Code
- Settlement guarantee fund
- Funds settlement
- Trading segments
Q2. Which term is described here? The exchange publishes a settlement calendar, including holidays, to determine pay-in and pay-out dates.
- Penalties for abuse
- Client onboarding
- Primary and secondary market
- Settlement calendar
Q3. Which term is described here? Close-out is the compulsory settlement of a position that cannot be delivered, at a price determined by the exchange.
- Close-out
- Fraudulent and unfair trade practices
- Mark-to-market margin
- Code of conduct
Q4. Which statement best describes “Pay-in and pay-out”?
- In rolling settlement, trades done each day are settled after a fixed number of days, now T+1 for equity.
- Pay-in is the delivery of securities and funds to the clearing corporation, and pay-out is the release to the buyer and seller.
- Allotment and listing must be completed within three working days of the closure of the issue.
- Staff must avoid conflicts, such as trading ahead of clients, and disclose any that cannot be avoided.
Q5. Which term is described here? Settlement of trades around corporate actions follows the ex-date, with the buyer entitled only if bought before the ex-date.
- Client onboarding
- Corporate action adjustments
- Greenshoe option
- Put-call ratio
Q6. Which statement best describes “Rolling settlement”?
- An underwriter commits to subscribe to the unsubscribed portion of an issue, giving certainty to the issuer.
- In rolling settlement, trades done each day are settled after a fixed number of days, now T+1 for equity.
- A broker must issue a contract note for every trade within 24 hours of execution, showing price, time, quantity and charges.
- Beta shows how sensitive a stock is to market movements; above 1 is more volatile than the index.
Frequently asked questions
How much of NISM Series XI comes from Unit 7?
Unit 7 (Clearing and settlement) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 50%.
What should I study in NISM Series XI Unit 7?
Rolling settlement and pay-in/pay-out. Clearing corporation role. Shortages and auctions.
Are these NISM Series XI practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
Next
UpperCrust Academy is independent study material from UpperCrust Wealth. It is not affiliated with NISM, SEBI or AMFI. For education only. Not investment advice. Always confirm the latest syllabus and rules on the official NISM website.