Reviewed by Sep 30, 2020| Updated on
A clearing corporation is an organisation/entity affiliated with a stock exchange whose primary objective is to oversee the handling of confirmation, settlement, and delivery of transactions. They are also referred to as Clearing Firm or Clearing House.
Business entities usually raise long-term capital in the capital market, which can be categorised into primary and secondary markets.
Bond and shares are initially issued in the primary markets without any intermediaries. Primary markets are also referred to as 'New Issue Market' because private entities, who want to go public, issue their shares for the first time in the form of Initial Public Offerings (NPO) in these markets. These markets are well regulated and ensure transparency in the sale of shares to investors.
Secondary markets handle securities that have already been issued. Unlike primary markets where the investors deal directly with the issuing company, prospective investors trade with the existing investors in the secondary market where the majority of the stock trading takes place.
Investors generally refer to this market as the stock market where the transaction occurs through stock exchanges.
In the year 2001, the Clearing Corporation of India Limited (CCIL) was established to handle trading, clearing, and settlement of transactions in the secondary stock market. Other functions of CCIL include overseeing operations in the derivatives market, government securities, foreign exchange markets, and money markets.
To ensure that investors do not experience substantial procedural losses in the transactions, CCIL also work on risk management where it tries to limit the risk factor that may occur in the case of default by an investor.
In the same lines, the liquidity risk, one of the most common risks that arise in settlement of the transaction process, is also covered by CCIL. In order to ensure liquidity in both securities and funds, CCIL has set up channels for credit from banks. This will compensate for any shortfall that can arise due to default by an investor.