Clearing & Settlement

CLEARING AND SETTLEMENT

Clearing and settlement refers to a process through which the Exchange settles the obligations arising out of the transactions it has recorded. The
Exchange stands as guarantor to the trades and is responsible for ensuring that the parties to the trade receive what they are entitled to.

The process of clearing can be defined as “the preparation through matching, recording and processing instructions of a transaction for settlement“ while
settlement is “the exchange of cash or assets in return for other assets or cash and transference of the ownership of those assets and cash“.

In the case of AHCX, the process relates to the mutual transfer of titles of the warehouse receipts and cash.

Parties in the process:

The parties in the process of clearing and settlement are as follows:

  • AHCX Clearing and settlement division: It works as the clearing house or the central counterparty for the trades. It issues debit and credit
    instructions to commercial banks to execute the transfer of funds.
  • Clearing members: These are members who participate in the process of clearing and settlement for trades executed on the Exchange. They are the
    recipients and payees of the funds for the trades.
  • Settlement banks: These are authorized commercial banks designated by the Exchange to assist in conducting settlement of transactions.

Defining the daily clearing limits:

AHCX determines the daily limit of clearing that the bank is ready to honor for each of the clearing member. The clearing member deposits funds into the
Exchange’s settlement account and the Exchange will guarantee that it will be in a position to transfer funds on the clearing member’s behalf. This will be
a commitment that is given by the Exchange to the trading member.

Furthermore, the Exchange gives its members (trading and clearing) the right to specify the trading (buying, selling or net trade) limits (client wise) as
well. However, the trading limits cannot be more than the overall clearing limits.

Based on the different limits set, the permission to trade will be given.

Trade reconciliation:

When a trade is presented for acceptance, the AHCX system validates it against the set limits. The trades are accepted only if the limits are permitting
the trades. After the trades, all the accepted trades are summarized to proceed for clearing.

Clearing and defining net obligation:

The Exchange follows a process of clearing based on net obligations against the open positions. The net obligation is determined by single side netting at
member level. This implies that all the individual client trades are netted off, while all net obligations are grossed for a single side. Finally the net
obligation, representing the net pay in (amount payable by the member to the Exchange) or a net payout (amount receivable by the member from the Exchange)
is determined. This is done by netting of the gross amounts of both sides.

Settlement:

Every morning the Exchange specifies limits of transactions that it is ready to honor for each member based on the amount of money each member has
deposited into the Exchange’s settlement bank accounts. This is where the Exchange fixes the settlement limit for each member.

Settlement is done through the Exchange’s various settlement accounts maintained for the members.

Role of commercial banks:

After the trades have been verified and approved, the clearing & settlement department generates each member’s net trade obligation to the Exchange.
The next day, the Exchange issues a debit instruction to commercial banks to settle through the Exchange’s settlement accounts. All trades are settled on a
T+1 principle (transaction date plus one working day).

Upon receipt of a settlement instruction, the bank debits AHCX’s settlement account and credits the member’s account.