Clearing Process — Novation and Netting
Clearing is the process of computing each party's net obligations post-trade. Novation replaces the original bilateral trade with the Clearing Corporation (CC) ...
Novation + Multilateral Netting
Clearing is the process of computing each party's net obligations post-trade. Novation replaces the original bilateral trade with the Clearing Corporation (CC) as counterparty to every trade. Multilateral Netting then reduces each clearing member's obligations to a single net figure per security.
NSCCL (now NSE Clearing Ltd) clears NSE; ICCL clears BSE; interoperability since June 2019. Novation: the original NSE buyer-seller trade is cancelled and REPLACED by two trades — CC buys from seller, CC sells to buyer. Now CC is counterparty to everyone, eliminating bilateral credit risk. Multilateral Netting: if a CM has 100 buy and 80 sell of Reliance across clients, net obligation = 20 buy (pay-in) instead of 180 gross transactions. Drastically reduces settlement volume and liquidity need. CM delivers net cash / securities via Pool Account at the depository.
Original trade killed; CC becomes universal counterparty
Sum all buys and sells → one net figure per scrip per CM
Depository account used for net securities pay-in/out
Buy on NSE, sell on BSE — single netted position since 2019
A Practical Example
Zerodha (CM for NSE + BSE) across 10 Lakh clients on trade date T:
• 3,21,000 buy shares of Reliance on NSE
• 2,87,000 sell shares of Reliance on NSE
• Net buy obligation via multilateral netting: 34,000 shares
• Zerodha must pay ₹8.16 Cr (34,000 × ₹2,400) to NSCCL on T+1 pay-in
• NSCCL will deliver 34,000 RIL to Zerodha's CDSL Pool Account
• Zerodha's own system then allocates those 34,000 across ~3,21,000 client demat accounts
Without netting, this would need 6,08,000 individual securities transfers — netting slashes it to 1 net transfer of 34,000.
What Makes This Important
Frequently Asked Questions
Without novation, if the original counterparty defaults, you're stuck chasing them. With novation, the CC becomes your counterparty — and the CC has a multi-layered risk framework (margin + SGF + mutual contributions) that makes default near-impossible.
🧠 Quick Quiz
2 questions to check your understanding