What is a clearing corporation?
A clearing corporation or clearing house is basically there to offset the liabilities of both buyers and sellers in the stock market. In the primary market for stocks, the corporation will sell to the public in order to raise funds for the corporation usually.
In the secondary market, people trade securities amongst themselves. The clearing corporations are part of the regulatory process in the secondary market.
- In a process known as 'novation' clearing houses act as the buyer to every seller and the seller to every buyer.
- In case either party defaults, the clearing house will step in and make good the loss.
- Due to this, when the trade begins, they will ask for a certain amount of money as 'margin' for security from both parties in the transaction when the transaction begins.
Clearing Corporations in India
In India, the Securities and Exchanges Board of India, SEBI, regulates the securities market. It is the regulatory authority created to protect the interests of investors and to promote the securities market and regulate it.
As part of their Market Regulation Department, SEBI supervises the clearing and settlement organizations. This means that to qualify as a clearing house, they will have to follow SEBI regulations-- namely the Securities Contract (Regulation) Act.
Do You Have to Deal With Them?
Well, if you're trading in stocks, then pretty much, yeah.
Dealing with clearing and settlement houses ensures that you do not lose out due to non-market factors. If you were going to make money on a transaction, then the other party might bail, but it won't affect you.