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NISM Series IV: Clearing, Settlement, Risk Management & Regulatory Framework for ETIRD

12 Apr 2026 • NISM-Series-4: Interest Rates Derivatives Mock Tests

 

NISM Series IV: Clearing, Settlement, Risk Management & Regulatory Framework for ETIRD

This is Part 8 of our NISM Series IV Interest Rate Derivatives study notes. This post covers Chapter 7 (Clearing, Settlement and Risk Management) and Chapter 8 (Regulatory Framework) of the NISM Series IV syllabus. These chapters are important from the exam perspective, especially the various margin types, settlement mechanisms, stress testing, and regulatory guidelines on participation.

Chapter 7: Clearing, Settlement and Risk Management How Does Clearing Work?

The clearing mechanism essentially involves working out open positions and obligations of clearing members. This position is considered for exposure and daily margin purposes.

The open positions of clearing members are arrived at by aggregating the open positions of all the trading members and all custodial participants clearing through them.

Key Terminologies in Clearing

  • Pay-In — A process whereby a Clearing Member brings in money and/or securities to the Clearing House/Corporation. This is the first phase of settlement activity.
  • Pay-Out — A process where the Clearing House/Corporation pays money or delivers securities to the Clearing Member. This is the second phase of settlement activity.

Clearing Corporation

The clearing corporation:

  • Determines fund/security obligations and arranges for pay-in.
  • Collects and maintains margins.
  • Processes for shortages in funds and securities.

The clearing corporation is supported by: clearing members, clearing banks, custodians, and depositories.

Types of Clearing Members

  • Trading-cum-Self-Clearing Member
  • Trading Member-cum-Clearing Member
  • Professional Clearing Member

Clearing Bank

The clearing bank acts as an important intermediary between clearing members and the clearing corporation. Every clearing member must maintain an account with empanelled clearing banks at designated clearing bank branches. These accounts are used exclusively for clearing and settlement operations.

Depository

A depository is an entity facilitating the holding of securities in electronic form and enables transfer of securities by book entry. The main objective is to provide paper-less trading with speed, accuracy, and safety.

Settlement Obligations

The Clearing Corporation receives trade details and prices from the exchange. Settlement obligations are computed using predefined methodology for the segment/product. Obligations are generated and downloaded to trading and clearing members at the end of the day.

Methods of determining settlement obligations:

  • Daily Mark to Market (MTM) settlement of futures contracts
  • Final settlement for cash-settled futures contracts
  • Premium settlement for option contracts
  • Exercise settlement for cash-settled option contracts
  • Netted obligation
  • Delivery settlement

Types of Settlement Physical Settlement vs Cash Settlement

Settlement follows clearing and consists of receipt and payment of cash and/or delivery of securities:

  • Physical Settlement — Exchange of cash for the security. Open position at the close of the last trading day must be settled with physical delivery of deliverable securities.
  • Cash Settlement — Only the profit/loss resulting from positions is paid/received. No delivery of securities.

The seller can always close ("square up") his position with an offsetting buy trade before the close of business on the last trading day.

Daily Mark to Market (MTM) Settlement of Futures

All positions of a clearing member in interest rate futures contracts are marked to market at the daily settlement price at the close of trading hours. Settlement is done by debit/credit of clearing accounts with the clearing bank on T+1. All open positions are carried forward at the latest daily settlement prices.

Premium Settlement for Option Contracts

Premium settlement for interest rate options is cash-settled by debit/credit of clearing accounts on T+1. The premium payable or receivable is computed after netting the positions at trading member/Custodial Participant level for each option contract at the end of each trading day.

Margins in ETIRD Margins on Physical Delivery Positions

For positions marked for delivery: Margin = VaR of futures on invoice price + 5% of face value + mark-to-market adjustments. Charged to both buying and selling clients. Levied from the intention day and released on settlement completion.

Margins from Last Trading Day to Last Intention Day

Margin = VaR on invoice price of the costliest security from deliverable basket + 5% of face value + MTM adjustments. Levied from the last trading day till receipt of intention to deliver.

Action When No Intent to Deliver

If no intent is provided by the selling CM up to two business days prior to the last delivery date, it is presumed the selling CM has failed to deliver. The auction mechanism (specified for security shortages) shall be activated. The auction takes place one business day prior to the last delivery date.

Initial Margin

Payable on all open positions of clearing members, up to client level, upfront by clearing members. Initial margin includes:

  • SPAN Margins
  • Margin on Consolidated Crystallized Obligation
  • Delivery Margins
  • Additional margins as specified by the clearing corporation

Net Option Value

Computed as the difference between long option positions and short option positions, valued at the last available closing price. The Net Option Value shall be added to the Liquid Net Worth of the clearing member.

Additional Margin

Exchanges/Clearing Corporations can impose additional risk containment measures over and above SEBI-mandated requirements. This is in addition to initial margin and extreme loss margin.

Core Settlement Guarantee Fund (SGF)

The corpus of the SGF should be adequate to meet all contingencies arising from member failures. A Minimum Required Corpus (MRC) must be maintained.

In the event of usage of Core SGF during a calendar month, contributors shall immediately replenish the Core SGF to MRC. However, such contribution for replenishment by members is restricted to only once during a period of 30 calendar days regardless of the number of defaults during the period.

Stress Testing and Back Testing Stress Test for Credit Risk

The Clearing Corporation (CC) shall carry out daily stress testing for credit risk using standardized methodology prescribed for each segment. CCs shall also develop their own scenarios for "extreme but plausible market conditions."

Liquidity Stress Test

CC shall ensure it maintains sufficient liquid resources to manage liquidity risks from members, settlement banks, and those generated by its investment policy.

Reverse Stress Test

CC shall periodically carry out reverse stress tests to identify under which market conditions the combination of its margins, Core SGF, and other financial resources prove insufficient to meet its obligations.

Chapter 8: Regulatory Framework for Exchange Traded Interest Rate Derivatives Dual Regulation

Exchange traded interest rate derivatives are jointly regulated by RBI and SEBI. Within the statutory regulations of RBI and SEBI, the Exchanges and Clearing Corporations frame the operational rules under their bye-laws.

Securities Contracts (Regulation) Act, 1956 [SC(R)A]

This Act provides for direct and indirect control of virtually all aspects of securities trading and the running of stock exchanges. It aims to prevent undesirable transactions in securities.

RBI-SEBI Standing Technical Committee

In a joint meeting on February 28, 2008, RBI and SEBI decided to constitute the RBI-SEBI Standing Technical Committee on Exchange Traded Currency and Interest Rate Derivatives. This committee oversees the framework for ETIRD.

RBI Definitions Under ETIRD Guidelines

  • Interest Rate Derivative (IRD) — Financial derivative contract whose value is derived from one or more interest rates, prices of interest rate instruments, or interest rate indices.
  • Interest Rate Futures (IRF) — Standardized interest rate derivative contracts traded on a recognized stock exchange. Include Money Market Futures.
  • Interest Rate Option (IRO) — Option contract whose value is based on Rupee interest rates or interest rate instruments.

Regulatory Guidelines on Participation by Various Entities Banks & Primary Dealers

Banks can participate in IRD for:

  • Hedging risk in the underlying investment portfolio.
  • Taking trading positions.

Important restriction: Banks are NOT allowed to undertake transactions in IRFs on behalf of clients. All derivative contracts are subject to the Suitability and Appropriateness policy.

Mutual Funds

Mutual funds are allowed to participate in ETIRD, subject to SEBI guidelines for mutual fund participation in derivatives.

Insurance Companies

IRDAI guidelines allow insurance companies to participate in Interest Rate Futures (IRF) only, and only for long hedge (not short hedge or speculation).

Foreign Portfolio Investors (FPIs)

A non-resident may undertake Rupee interest rate derivatives transactions in India for:

  1. Hedging an exposure to Rupee interest rate risk (as stipulated by RBI).
  2. Purposes other than hedging, to the extent stipulated by RBI.

NBFCs

Applicable NBFCs can participate in IRF exchanges as clients for the purpose of hedging their underlying exposures. All non-deposit-taking applicable NBFCs with asset size of ₹1,000 crore and above may also participate as trading members, subject to RBI/SEBI guidelines.

Role of FIMMDA

The Fixed Income Money Market and Derivatives Association of India (FIMMDA) is a voluntary market body for the bond, money, and derivatives markets. Its members include:

  • Scheduled Commercial Banks (Nationalized, Private, Foreign)
  • Financial Institutions
  • Primary Dealers
  • Insurance Companies

FIMMDA is an association of Scheduled Commercial Banks, Financial Institutions, Primary Dealers, and Insurance Companies. It represents all major institutional segments of the market.

Quick Recap for NISM Series IV Exam

  • Pay-in = Phase 1; Pay-out = Phase 2 of settlement.
  • MTM settlement for futures = T+1.
  • Physical delivery margin = VaR + 5% of face value.
  • No intent to deliver → auction mechanism activated 1 business day before last delivery date.
  • Core SGF MRC must be replenished if used; max once per 30 calendar days.
  • ETIRD jointly regulated by RBI and SEBI.
  • Banks can participate in IRD but NOT on behalf of clients in IRFs.
  • Insurance companies — IRF only, long hedge only.
  • NBFCs with ₹1,000 crore+ asset size can be trading members.
  • FIMMDA = voluntary market body for bond, money and derivatives markets.

Next Blog Post: Chapter 9 & 10 — Accounting, Taxation, Code of Conduct, and Investor Protection Measures for the NISM Series IV exam.

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