Clearing Charges

What are Clearing Charges in Stock Market and when are they applicable?

The Clearing Charges refer to the fees that is collected by a Clearing Member from their customers, in order to process the clearing and settlement of financial transactions. The amount that is collected could be a fixed fees or a variable fees, depending on the size of the transaction.

Clearing is a broad term and it is used in multiple ways in the different industries.

Example: In Banking industry, the banks impose a fees on the clearing of outstation cheques.
Whereas in capital markets, some Stock Brokers collect a fees from the client, to settle the trades that have been executed on the Stock Exchange. While other Brokers charge a zero fees for Clearing of trades.

This page will focus on Clearing Charges that are applicable in case of buying/selling of stocks through the Stock Exchange. But the idea and concept remains the same across industries.

Clearing in stock markets

In stock markets, the term ‘Clearing’ refers to the process of determining the cash obligation of the buyer and the delivery obligation of the securities, by the seller. When an investor buys shares, he/she wants to be sure that the securities will be received on time. Similarly, the Seller wants to be sure that the buyer has enough funds to make the payment for the securities.

A trade is not finished until the buyer has received the securities and the seller has received the money. The trade is completed only when the following three steps are successfully done:

Note: Some investors, Brokers and news sources consider the Clearing Process to be a part of the Settlement Process, and use the term ‘Settlement Cycle‘ for the entire back-end process after execution of the order.

Clearing and Settlement

On a high level, the Settlement Process involves the following steps:

  1. A list of trades executed in the day is forwarded to the Clearing Corporation, by the Stock Exchange
  2. The Clearing House matches, validates and confirms the trades with the exchange and the Clearing Members
  3. A final report containing the deliverable and receivable obligations is built for the members
  4. Settlement happens by fulfilling the Pay-in and Pay-out obligations of the members
  5. Dispute resolution takes place, in case of any problems in the trade settlement

Why these charges have to be paid separately?

Some Stock Brokers outsource their Clearing and Settlement process to a Professional Clearing Members (PCM). These are specialized organizations who do not trade on the Stock Exchange, but are only involved at clearing and settlement time, on behalf of their clients (the Broker).

In exchange for their services, the PCMs charge a fees to the Stock Brokers and the Brokers usually pass these charges to the end customers. This fees + any other charges incurred by the broker for the Clearing and Settlement process, are known as the Clearing Member Charges.

If the Stock Brokers have the technical capabilities, then they could create a department for in-house Clearing of transactions. After that, they could directly register with the Clearing House as a member. This type of a Broker is known as a self-clearing member.

How much is the Clearing fee?

The charges collected by the Stock Brokers will largely depend on the clearing mechanism that they follow and the segment that is being traded.

Example: Clearing Charges for Derivative contracts could be different from the Clearing Charges for Stocks and other instruments, because:

  1. Derivatives could have a different Settlement Cycle and process, when compared to stocks
  2. If settled before the expiry, the Derivatives do not require the physical delivery of the financial securities and the settlement is done on Cash basis. Whereas in case of stock trading, the stocks have to be transferred from 1 Demat Account to the other.
    Etc.

Therefore, the investors should check the Clearing Charges and other fees collected by the Stock Broker, before they open a Trading Account. In case the Broker opts for self-clearing, then they do not have to pay any external organization for the Clearing process. So, they might charge a zero fees from their clients for Clearing and Settlement.

Tax on Clearing Fees

Since the Clearing Charges in Trading Account are technically a fees, paid in return for a service (Clearing and Settlement), GST will be payable on top of this fees. Currently, GST at the rate of 18 % is applicable on the fees amount.

Therefore, if a Broker charges INR 100 for Clearing Process, then INR 18 tax will be applicable on this, and the net amount payable by the investor will be INR 118.

The investors can see all the applicable fees/charges and taxes in the Contract Note, that is sent at the end of the trading day. Some Brokers might not have a separate entry for these charges in the Contract Note. Instead, they would show these charges as part of the Brokerage.

Disclaimer

  • This page is for education purpose only
  • Some information could be outdated / inaccurate
  • Investors should always consult with certified advisors and experts before taking final decision
  • Some images and screenshots on this page might not be owned by FinLib

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