Settlement of Bond Trades 1 Bonds Settlement Process: Rocket Science or not?

Currently, the bond settlement process is not as simple and easy as that for equity. In the case of equity investments, there are countless brokers who provide User Interface, which is very clean and simple to use and provide end-to-end settlement. While in the case of bond investment, we don’t find any platforms or apps which allow for the same. But even if it is slightly tedious, it is no rocket science too. This article aims to explain how the settlement process works for bond trades.

What is settlement? 

Let say you want to invest in some bond. You have decided which bond to buy and agreed on the price/yield at which you want to buy the bond. What is the next step? That would be the settlement. The seller has to transfer the bonds to you, and you need to pay the seller money as promised. 

The first thing you would need is the Demat account. A Demat account is just like a bank account, but for stocks or bonds. All stocks or bonds are “Dematerialised” in India, and this means that they are converted into identifiable units that can be transferred from one person’s Demat account to another.

You can open a Demat account with a Depository Participant. 

The next step would be for the seller/buyer to book the trade on the exchange and inform the buyer/seller of the same. Either party can book the trade, but at least one of the parties should have access to the bond settlement platform of the exchange. Currently, two exchanges in India provide a bond settlement platform, one is the NSE, and the other is BSE. BSE Settlement platform is known as NDS- RST, and NSE Settlement platform is known as NSE CBRICS.

Credavenue infographic 2 Bonds Settlement Process: Rocket Science or not?

Next, the seller will be transferring the bonds to the clearing corporation account. This can be done by filling up DIS slips and submitting the same to the Depository Participant with which the seller has their Demat account.

The seller could also avail the e-DIS facility and do the same instantly. We encourage all market participants to avail the e-DIS facility from the respective depositories to ensure a faster and easier settlement process.

As the seller transfers bonds to the clearing corporation’s Demat account, the buyer will be transferring the consideration amount simultaneously to the clearing corporation bank account. The transfer can be done via RTGS directly to ICCL or NSCCL.

Once the consideration has been transferred by the buyer and the bonds have been transferred by the sellers to the clearing corporation, the clearing corporation will match the trade payins with the trade booked on the exchange, and perform payout of the bonds to the buyer and the consideration to the seller. The bonds will reflect in the buyer Demat account and the money in the seller’s bank account. 

And that is how the trade is completed. 

Frequently Asked Questions.

What is a Depository Participant? 

A depository participant is an entity that maintains your Demat account and interacts with the depository on your behalf.

What is an Exchange? 

An exchange is a place where buyers and sellers can buy and sell their securities. The exchanges have an order matching system that matches the trades. Currently for corporate bonds through such an automated order matching system is not available. But exchanges have a trade booking and settlement platform, which allows for smoother settlement of trades. This is also a regulatory requirement for certain entities to book trades via exchange.

What is a Depository?   

Depositories maintain the bonds in the dematerialized form. There are two depositories in India, NSDL and CDSL, and effectively they maintain the master record of the Demat accounts. 

What is a Clearing Corporation? 

 A clearing corporation is a party that takes care of the settlement and clearing of bond transactions. Think of it like a bank clearing payment transaction. The NSE clears trades trade via the NSSCL( NSE Clearing Limited), and the BSE clears trade via ICCL( Indian Clearing Corporation Limited).

What is DIS Slip & why is it important? 

DIS is Delivery Instructions Slip. As seen in the sample below, DIS contains the details of the bond, such as the ISIN, bond units, date and the details of the Demat account where the bonds need to be transferred.

Screenshot 2021 11 11 at 5.20.18 PM Bonds Settlement Process: Rocket Science or not?

What is E- DIS? 

E- DIS is an Electronic Delivery Instruction Slip. E-DIS allows a client to sell their bonds in real-time without submitting the physical delivery instruction slip. This avoids the hassle in the trade settlement process and reduces the time in which the trade can be complicated. 

Why book the trade on exchange? 

Booking the trade on the exchange platform eliminates the counterparty risk which is present in bilateral trades. It also creates a trail of the entire trade, which helps both parties in cases of any disputes between parties in the future. 

Is there any regulatory requirement for booking the Trade on Exchange? 

For entities that come under RBI and SEBI regulations, it is a requirement to book trades on the exchange platform of BSE or NSE or the trade reporting platform of FIMMDA. The trade should be reported within 15 minutes of being executed. 

Does the booking and settlement both have to happen through exchange? 

No, the regulatory requirement is only to book the trades and not settle trades on the exchange platform. Even if one books the trades on the platform, the actual settlement can happen offline. But we encourage participants to use the exchange mechanism for settlement as it eliminates the counterparty risk. 

How does the YubiInvest team help me in the settlement process? 

Once the trade has been settled on YubiInvest, our operations team will reach out to buyers and sellers. Both buyers and sellers might need to provide their basic data such as the CML copy, which is like a Bank Passbook of the Demat Account, their PAN Card and Bank account details of the bank from which they will be transferring the funds. The Plutus team will guide both the buyers and sellers on booking the trade.

Yubi through the YubiInvest platform provides a unified solution for investments into bonds. To know more details, please get in touch with us at plutus.retail@go-yubi.com

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