US Fed rate hike impact on India

What is Interest Rate?

Essentially, interest is nothing more than the cost someone pays for the use of someone else's money. Homeowners know this scenario quite intimately. They have to use a bank's money, through a mortgage, to purchase a home, and they have to pay the bank for the privilege. Credit card users also know this scenario quite well - they borrow money for the short-term in order to buy something right away. But when it comes to the stock market and the impact of interest rates, the term usually refers to something other than the above examples - although we will see that they are affected as well.

The interest rate that applies to investors is the Federal Reserve's funds rate. This is the cost that banks are charged for borrowing money from Federal Reserve banks. Why is this number so important? It is the way the Federal Reserve (the "Fed") attempts to control inflation. Inflation is caused by too much money chasing too few goods (or too much demand for too little supply), which causes prices to increase. By influencing the amount of money available for purchasing goods, the Fed can control inflation. Other countries' central banks do the same thing for the same reason.

Basically, by increasing the federal funds rate, the Fed attempts to lower the supply of money by making it more expensive to obtain.

Stock Price Effects

Clearly, changes in the federal funds rate affect the behaviour of consumers and businesses, but the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock's price, take the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices.

If a company is seen as cutting back on its growth spending or is making less profit - either through higher debt expenses or less revenue from consumers - then the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company's stock. If enough companies experience declines in their stock prices, the whole market, or the indexes (like the Dow Jones Industrial Average or the S&P 500) that many people equate with the market, will go down.

Investment Effects

For many investors, a declining market or stock price is not a desirable outcome. Investors wish to see their invested money increase in value. Such gains come from stock price appreciation, the payment of dividends - or both. With a lowered expectation in the growth 

and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable.

Furthermore, investing in stocks can be viewed as too risky compared to other investments. When the Fed raises the federal funds rate, newly offered government securities, such Treasury bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the "risk-free" rate of return goes up, making these investments more desirable. When people invest in stocks, they need to be compensated for taking on the additional risk involved in such an investment, or a premium above the risk-free rate. The desired return for investing in stocks is the sum of the risk-free rate and the risk premium. Of course, different people have different risk premiums, depending on their own tolerances for risk and the companies they are buying into. In general, however, as the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential return remains the same or becomes lower, investors might feel that stocks have become too risky, and will put their money elsewhere.

US Fed Rate hike impact on India

After 2008 crisis, US Fed slashed the interest rates to 0.25% to support the economy. Since then US Fed has kept interest rate constant to increase liquidity in the US market. The emerging markets were the major beneficial of low-interest rates since investors invested in emerging markets because US market was fragile. But now the US economy is improved and on 17 September, Fed will contemplate to raise interest rates. This may lead to capital outflow from emerging markets since investors will prefer to invest in US market both in debt (better yield) and equity (better economic growth). Considering the strong growth in India, it is unlikely that the long-term investment story of Indian will get impacted due to this hike. However, US Fed’s decision may have a temporary negative impact on Indian markets in the following ways:

Impact on Indian Rupee

Indian Rupee will depreciate if US fed will raise the interest rate. US interest rate hike will be an indication that US economy is in good shape. Thus foreign investors in Indian markets will withdraw their money and invest in US market. In addition, the depreciation of Indian Rupee will lead to higher current account deficit and higher inflation.

Impacts on Indian equity market

On the fear of the possible US Interest rate hike equity market has already corrected recently. The hike in US interest rate hike will depreciate the Indian Rupee against US dollar. The foreign investors who have invested in Indian market will fear that the depreciation in Indian Rupee will wipe out their profits. Thus, they will start book profits.

For example, let’s say an investor invested USD 1,00,000 a year ago in India when the exchange rate is Rs 61 per US Dollar; in Indian Rupee he invested Rs 61,00,000. In one year, he made 10% return and his portfolio rose to Rs 67,10,000. After US interest rate hike, let say Indian Rupee depreciated to Rs 69 per US Dollar; his portfolio in US Dollar will dip to USD 97,246.38 and he will incur a loss of USD 2,753.62. Thus, he will prefer to book profits.

However, the IT and pharma are the biggest beneficiary of the Rupee depreciation and retreating US economy.

Impact on Indian Debt Market

There is a huge difference in interest rate in India and US. The policy rate is India is 7.25% while in the US it is 0.25%. Theoretically, an investor can borrow money from the US at 0.25% and invest in India for 7.25%. Thus, he will earn 7% return after paying back the borrowed money. The subsequent interest rate hikes by US Fed will reduce this gap and foreign investors will show reluctance to invest in India since the risk-reward will become less favourable. This is in addition to lower returns due to depreciation of the rupee.

Conclusion

India is not isolated from the impact of US interest rates. There may be some temporary capital outflow from the Indian market if US Fed hikes the interest rate. In long-run, Indian economy is attractive with a growth of 7% and inflation under control, thus investors will not be able to stay away from investing in India.

Euroclear

Euroclear is one of two principal clearing houses for securities traded in the Euromarket. Euroclear specializes in verifying information supplied by two brokers in a securities transaction and the settlement of securities. Euroclear is market owned and governed, and has previously acquired London Crest, Necigef Netherlands, Sicovam Paris and CIK Brussels.

Activities

Euroclear settles domestic and international securities transactions, covering bonds, equities, derivatives and investment funds. Euroclear provides securities services to financial institutions located in more than 90 countries.

In addition to its role as an International Central Securities Depository (ICSD), Euroclear also acts as the Central Securities Depository (CSD) for Belgian, Dutch, Finnish, French, Irish, Swedish and UK securities. Euroclear also owns EMXCo, the UK's leading provider of investment-fund order routing. Euroclear is the largest international central securities depository in the world.

Financial Information eXchange

What is FIX?

The Financial Information eXchange (FIX) protocol is an electronic communications protocol initiated in 1992 for international real-time exchange of information related to the securities transactions and markets. With trillions of dollars traded annually on the NASDAQ alone, financial service entities are investing heavily in optimizing electronic tradingand employing direct market access (DMA) to increase their speed to financial markets. Managing the delivery of trading applications and keeping latency low increasingly requires an understanding of the FIX protocol.

The Financial Information eXchange (FIX®) Protocol has revolutionised the trading environment, proving fundamental in facilitating many of the electronic trading trends that have emerged over the past decade.

FIX has become the language of the global financial markets used extensively by buy and sell-side firms, trading platforms and even regulators to communicate trade information. This non-proprietary, free and open standard is constantly being developed to support evolving business and regulatory needs, and is used by thousands of firms every day to complete millions of transactions.

FIX is the way the world trades and it is becoming an essential ingredient in minimising trade costs, maximising efficiencies and achieving increased transparency. FIX offers significant benefit to firms keen to explore new investment opportunities; it reduces the cost of market entry with participants able to quickly communicate both domestically and internationally, in addition to significantly reducing switching costs.

The FIX Protocol language is comprised of a series of messaging specifications used in trade communications. Originally developed to support equities trading in the pre-trade and trade environment, it is now experiencing rapid expansion into the post-trade space, supporting straight-through processing (STP) from indications of interest (IOI) to allocations and confirmations. Additionally, it is witnessing significant growth in the fixed income, foreign exchange and listed derivative markets.

Who Uses FIX?

FIX® has become the way the world trades. Virtually every major stock exchange and investment bank uses FIX for electronic trading, alongside the world's largest mutual funds, money managers and thousands of smaller investment firms. Leading futures exchanges offer FIX connections and major bond dealers either have or are implementing them. Identifying an exact number of users is impossible, as FIX is a free and open standard, but it is very clear that the world’s financial community now speaks FIX.

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Direct and Regular Plans of Mutual Fund Schemes

There are two broad ways in which you can invest in mutual funds. Through a distributor (regular plan) or directly with the AMC (direct plan). For every MF scheme, there are two plans available, viz. direct plan and regular plan. For instance, you can invest in HDFC Balanced Fund-Direct plan or HDFC Balanced Fund-Regular plan.

What Is the Difference Between Regular and Direct Plans of the Same Scheme?

The only difference is distributor commission. Everything else including the portfolio and fund manager is same across the two types of plans.

Under regular plans, since you are going through a distributor, there is a cost attached to it. Asset management company (AMC or the mutual fund house) pays commission to the distributor on your behalf. You do not have to pay the Asset Management Company (AMC) directly. AMC pays the distributor but money comes from your investment. Since a part of your investment is going towards distributor commission, it affects your returns.

Under direct plans, you invest directly with the fund house. Recently, a few online portals have come up which let you invest in direct plans of MF schemes. Since there is no distributor involved, there is no commission to be paid.  And that adds to the return.

How Do I Know If I Am Investing in Regular or Direct Plans?

Regular plans are the norm. Direct plans were launched quite recently in January, 2013 only.

You are investing in regular plans if:

1. 1. You are investing through a local distributor.
2. 2. You are investing through a bank branch.
3. 3. You are investing through online portals such as ICICIDirect or FundsIndia.

Alternatively, you can download your account statement from AMC website or CAMS or Karvy website. You will have “Reg” mentioned in front of regular plan investments and “Direct” in front of your Direct plan investments.

Points to Note

NAV of Direct plan of a scheme is higher than NAV of regular plan of the same scheme. However, that does not mean direct plans are expensive. NAV of direct plan is higher than regular plan because direct plan offers better return. NAV of direct plan and regular plan started at the same level on January 1, 2013. NAV of direct plans have inched ahead since then due to better returns. The gap will only grow over a period of time. Direct plan of a MF scheme will always give better returns than regular plan of the same MF scheme. It is a mathematical construct.

What Is the Difference in Returns?

Difference in returns will be due to the commission paid to the distributors. Difference will vary across schemes.  You can expect difference to be higher in equity funds than debt funds. Typically, it ranges from 0.5% to 1.25% p.a. in an equity fund. This difference may seem small. However, it will lead to a huge difference in portfolio value over the long term because of compounding of returns. 

Can I Switch from Regular Plan to Direct Plan?

Yes, you can. For instance, you can switch your investments in HDFC Balanced Fund-Regular plan to HDFC Balanced Fund-Direct plan. However, do note switch from regular to direct plan is equivalent to redemption from regular plan of MF scheme and subsequent investment in direct plan of MF scheme. Hence, capital gains tax and exit load implication will arise at the time of redemption. Exit load refers to the penalty charged by AMC if you redeem your investment too soon. Typically, AMCs charge exit load of 1% if you exit your investment in equity mutual fund before 1 year. Short term capital gains (<=1 year) on equity funds are taxed at 15% while long term capital gains are exempt from tax. Short term capital gains (<=3 years) on debt funds are taxed at marginal income tax rate while long term capital gains are taxed at 20% less indexation. If you are planning to switch, do keep this aspect in mind.

Here is what you can do:

1. 1. Make fresh investments only in direct plans.
2. 2. You can also stop your existing SIPs in regular plans and start new
3.  SIPs in direct plans.
4. 
   

How can I invest in Direct plans of MF schemes?

You can visit branches of AMCs or CAMS or Karvy offices to invest in direct plans. You can also register on individual AMC websites to invest in direct plans. However, you will have to remember login credentials for every AMC website. Recently, many online portals have come up that let you invest in direct plans from multiple AMCs. If you register with them, you can invest in schemes from multiple AMCs from a single interface. A few examples are Invezta, OroWealth, UnoVest etc. All these portals charge either a flat fee or a percentage of assets for the service offered. Still, these will be less expensive than regular plans. 

And yes, there is MF Utility. MF Utility is an initiative by 25 AMCs. You can register with MFUtility and invest in direct plans online. The service is free of cost. Go through this post to know more about how to register with MF Utility.

What should you do?

It makes sense to invest in direct plans of MF schemes. You must also shift your investments in regular plans to direct plans. There is a caveat though. Direct plans are more suited to Do-it-yourself (DIY)investors, who can research mutual funds and assess fund suitability on their own. Such investors can review and rebalance their portfolios themselves. It makes little sense for such investors to stick with regular plans. DIY investors must shift to direct plans. There are many of us who do everything on own but still invest in regular plans (say through online platforms such as ICICIDirect). It is criminal waste of money for such investors to invest in regular plans.

If you can’t do that, you can contact a SEBI Registered Investment Adviser (SEBI RIA). Such advisors charge a fee and recommend funds based on your requirements. You can subsequently invest in direct plans of MF schemes. If you don’t want to pay fee either (and yes, many don’t want to write a cheque), then you are better off sticking to a local distributor or a robo-advisory platform. In my opinion, cost of selecting the wrong fund and poor investment discipline is much more than 0.5%-1% p.a.

What Is The Relationship Between The Federal Funds, Prime And LIBOR Rates?

If you watch the news, you undoubtedly hear from time to time that the Federal Reserve has decided to increase or decrease its key interest rate. When this is the case, you can probably guess that the central bank is trying to either slow economic growth or give the country a financial lift.

Perhaps less clear is whether a change to this interest rate, known as the federal funds rate, impacts you on a personal level. If you have a credit card, an adjustable-rate mortgage or a private student loan, it probably does. Many variable-rate financial products are tied to either of two benchmark rates – prime or LIBOR. And while the Fed doesn’t control these rates directly, they do tend to move in the same direction as the federal funds rate.

An Overview of the Funds Rate

To understand how decision-making by the Fed – and more specifically, its Federal Open Market Committee – affects consumer and business loans, it’s important to understand how the federal funds rate works.

According to U.S. regulations, lending institutions have to hold a percentage of their deposits with the Federal Reserve every night. Requiring a minimal level of reserves helps stabilize the financial sector by preventing a run on banks during times of economic distress. What happens when a U.S. bank is short on cash at a given time? It has to borrow it from other lenders. The funds rate is simply the rate one bank charges another institution for these unsecured, short-term loans.

So how does the Fed influence this rate, exactly? It has two main mechanisms it can use to achieve the target rate desired: buying and selling government securities in the open market, and changing the required reserve percentage.

When the Fed buys or sells government securities in the open market, it adds or reduces the amount of cash in circulation. This way, the Fed is able to dictate the price of borrowing among commercial banks. Let’s say the committee agrees that the economy needs a boost and decides to reduce its target rate by a quarter of a percentage point. To do this, it buys a specific amount of government securities on the open market, infusing the financial system with cash. According to the laws of supply and demand, this influx of cash means private banks aren’t able to charge each other as much for loans. Therefore, the rate for overnight lending among commercial banks goes down. If the Fed wants to increase the rate, it could do the opposite by going into the open market and selling government securities. This reduces the amount of cash in the financial system and influences banks to charge each other a higher rate.

Changing the required reserve percentage has a similar effect but is seldom used. Reducing the required reserve percentage increases excess reserves and cash in the system. The opposite is true when increasing the required reserve percentage. The reason it is not a very common approach by the Fed is that it is considered the most powerful tool for influencing economic growth. Given the magnitude of the U.S. financial system, its movements are felt worldwide, and a minimal change in the required reserve percentage could have a bigger impact than desired.

Relationship to Prime

While most variable-rate bank loans aren’t directly tied to the federal funds rate, they usually move in the same direction. That’s because the prime and LIBOR rate, two important benchmark rates to which these loans are often pegged, have a close relationship to federal funds.

In the case of the prime rate, the link is particularly close. Prime is usually considered the rate that a commercial bank offers to its least-risky customers. The Wall Street Journal asks 10 major banks in the U.S. what they charge their most creditworthy corporate customers. It publishes the average on a daily basis, although it only changes the rate when 70% of the respondents adjust their rate.

While each bank sets its own prime rate, the average consistently hovers at three percentage points above the funds rate. Consequently, the two figures move in virtual lock-step with one another.

If you’re an individual with average credit, your credit card may charge prime plus, say, six percentage points. If the funds rate is at 1.5%, that means prime is probably at 4.5%. So our hypothetical customer is paying 10.5% on his/her revolving credit line. If the Federal Open Market Committee lowers the rate, he/she will enjoy lower borrowing costs almost immediately.

The LIBOR Connection

While most small and mid-sized banks borrow federal funds to meet their reserve requirements – or lend their excess cash – the central bank isn’t the only place they can go for competitively priced short-term loans. They can also trade eurodollars, which are U.S.-dollar denominated deposits at foreign banks. Because of the size of their transactions, many larger banks are willing to go overseas if it means a slightly better rate.

LIBOR, perhaps the most influential benchmark rate in the world, is the amount banks charge each other for eurodollars on the London interbank market. The IntercontinentalExchange (ICE) group asks several large banks how much it would cost them to borrow from another lending institution every day. The filtered average of the responses represents LIBOR. Eurodollars come in various durations, so there are actually multiple benchmark rates - one-month LIBOR, three-month LIBOR and so on.

Because eurodollars are a substitute for federal funds, LIBOR tends to track the Fed’s key interest rate rather closely. However, unlike the prime rate, there were significant divergences between the two during the financial crisis of 2007-2009.

Figure 1

The following chart shows the funds rate, prime rate and one-month LIBOR over a 10-year period. The financial upheaval of 2008 led to an unusual divergence between LIBOR and the funds rate.

Part of this has to do with the international nature of LIBOR. Many foreign banks around the world hold eurodollars, too. As the crisis unfolded, many hesitated to lend or feared that other banks wouldn’t be able to pay back their obligations. Meanwhile, the Federal Reserve was busy buying securities in an effort to bring down the funds rate for domestic lenders. The result was a significant split between the two rates before they once again converged.

If you happened to have a loan indexed to LIBOR, the effect was sizable. For instance, a homeowner with an adjustable-rate mortgage that reset during late 2008 may have seen his/her effective interest rate jump more than a full percentage point overnight.

The Bottom Line

Two of the most prominent benchmark rates, prime and LIBOR, both tend to track the federal funds rate closely over time. However, during periods of economic turmoil, LIBOR appears more likely to diverge from the central bank’s key rate to a greater extent. For those with a LIBOR-pegged loan, the consequences can be significant.

Trade Life Cycle/Securities trade life cycle

Have you wondered what happens when you initiate a trade, in simple terms when you put an order to buy or sell a stock/shares in the stock market through your trading terminal.

To understand trade life cycle we need to understand detailed steps involved in trade life cycle.
Below mentioned are the important steps:
1. Order initiation and delivery. (Front office function)
2. Risk management and order routing.(middle office function)
3. Order matching and conversion into trade.(front office function)
4. Affirmation and confirmation.(back office function)
5. Clearing and Settlement.(back office function)


PICTORIAL VIEW OF TRADE CYCLE

Them main objective of every trade is to get executed at the best price and settled at the least risk and less cost. Some may say trade life cycle is divided into 2 parts pre-trade activities and post trade activities, well, pre-trade activities consists of all those steps that take place before order gets executed, post trade activities are all those steps that involve order matching, order conversion to trade and entire clearing and settlement activity.

Now lets discuss every step of life cycle in detail.

Order initiation and delivery. (Front office function)

Who initiates the orders: Retail client like me and you, institutional clients like any Mutual fund company's.

Clients keep a close watch on the stock market and build a perception on the movement of market. They also try to find investment opportunities so that they can build position in the market. Positions are the result of trade that are executed in the market.Clients place orders with brokers through telephone, fax , online trading and hand held devices. Orders can be placed either market orders or limit orders, market orders means order to buy or sell is placed at the market price of the share/equity/stock that the investor/client wants to buy/sell whereas limit orders means order placed to buy or sell at a price that investor/client wants to buy/sell.

When Broker receives these orders, he/she records these orders carefully so that there is no ambiguity/mistakes in processing. Institutional investor/ fund manager at this stage would not have decided on the allocation of the funds so he/she will just contact sales desk and place the order so that later they can allocate their investments to the mutual funds(irrespective whether it is buy/sell).

Risk management and order routing.(middle office function)

As we know that getting trades settled lies with the broker, if any client makes any trade default, then the same has to be made good by the broker to the clearing corporation by broker.

When orders are accepted and sent to exchange these orders go through various risk management checks institutions and retails clients. Although the risk management checks are more for retail investors , the underlying assumptions is that they are less creditworthy also due to online trading the client has become faceless so the risk has increased more.Its not same for institutional investors because they have a large balance sheet compared to the size of orders they want to place. They also maintain collateral with the members they push their trades through. Their trades are hence subjected to fewer risk management checks than retail clients.

Below are the steps how risk management is done in case of retail transactions: 

• Client logs into the trading portal provide credential and places orders.
• The broker validates that the order is coming from a reliable source.
• Lets say the client places buy order, in this case the broker places query to verify whether the client has sufficient balance(margin money) and passes the order to the exchange, in case the client does not have sufficient margin then order is rejected. If client has the margin money then the order is accepted and margin money is reduced from the available margin so that client is aware of the real time margin available to him for trade, also to make sure that he/she does not place order more than margin money available so later on the broker need not make good on behalf of client to the exchange.
• Lets say the client places sell order, in this case the broker places query to verify whether the client has sufficient stocks to place the order in case of there are no sufficient stocks then the order stays rejected, if there are sufficient stocks available then the order is accepted and stocks are blocked for sale and remaining stocks are shown as balance available for sell.
• Once the above risk management check passes then the order is passed to the exchange.
• On receipt of the order, the exchange immediately sends an order confirmation to the broker's trading system.
• Depending upon the order terms and the actual prices prevailing in the market, the order could get executed immediately or remain pending in the order book of the exchange.

A margin is an amount that clearing corporations levy on the brokers for maintaining positions on the exchange. The amount of margin levied is proportional to the exposure and risk the broker is carrying. Since positions may belong to a broker’s clients, it is the broker’s responsibility to recover margins from clients. To protect the market from defaulters, clearing corporations levy margins on the date of the trade.

Order matching and conversion into trade.(front office function)

Below are the steps:

• All the orders are collated and sent to the exchange for execution, exchange tries to allot the shares in the best price available to the investors.
• Broker has the record of all the orders that were received from whom , at what time, against which stock, type of order and quantity. Broker maintains these records against client ID.
• Brokers are in real time conversation with exchange so that they have details of how many orders are still pending and and how many have been executed in the exchange.
• Once the order is executed it turns into trade and exchange sends sends notification of the trade to the broker. The broker in turn communicates these trades to the client either immediately or end of day.
• Official communication from broker is done to the client through contract note, which contains details of the trade executed along with taxes being charged and commission being charged by the broker and other institutions like clearing corporation, custodian etc...

Affirmation and confirmation.(back office function)

Every institution engages the services of an agency called a custodian to assist them in clearing and settlement activities. Institutions specialize in taking positions and holding. To outsource the activity of getting their trades settled and to protect themselves and their shareholder’s interests, they hire a local custodian in the country where they trade. When they trade in multiple countries, they also have a global custodian who ensures that settlements are taking place seamlessly in local markets using local custodians.

As discussed earlier, while giving the orders for the purchase/sale of a particular security, the fund manager may just be in a hurry to build a position. He may be managing multiple funds or portfolios. At the time of giving the orders, the fund managers may not really have a fund in mind in which to allocate the shares. So to make more profit and avoid unfavourable market conditions he/she places the order.

The broker accepts this order for execution. On successful execution, the broker sends the trade confirmations to the institution. The fund manager at the institution during the day makes up his mind about how many shares have to be allocated to which fund and by evening sends these details to broker. Brokers does a cross verification whether all the alocation details match the trade details and  then prepares the contract notes in the names of the funds in which the fund manager has requested allocation.

Along with the broker, the institution also has to send details to custodian for the orders it has given to the broker. The institution provides allocation details to the custodian as well. It also provides the name of the securities, the price range, and the quantity of shares ordered. This prepares the custodian, who is updated about the information expected to be received from the broker. The custodian also knows the commission structure the broker is expected to charge the institution and the other fees and statutory levies.

On receipt of the trade details, the custodian sends an affirmation to the broker indicating that the trades have been received and are being reviewed.Trades are validated to check the following:

• Whether trade has happened on the desired security.
• Whether the trade is correct i.e buy or sell.
• The price at which rate it was executed.
• Whether the charges are as per the agreement.

For this verification process the custodian normally runs a software such as TLM for recon process.In case the trade details do not match, the custodian rejects the trade, and the trades shift to the broker’s books. It is then the broker’s decision whether to keep the trade (and face the associated price risk) or square it at the prevailing market prices.

Clearing and Settlement.(back office function)

As we know that there are hundreds and thousands of trades being executed everyday and all these trades needs to be cleared and settled. Normally all these trades gets settled in T+2 days, which means the trade will gets allotted to the investor to his/her demat account in 2 days from trade date. 

The clearing corporation has obligation to every investor in form of 

• Funds (for all buy transactions and also to those transactions that are not squared for the sale positions).
• Securities(for all the sale transactions done)

Clearing corporation calculates and informs the members of what their obligations are on the funds side (cash) and on the securities side. These obligations are net obligations with respect to the clearing corporation. Lets say broker purchased 1000 shares of reliance for client A  and sold 600 shares of reliance for client B which means the obligation of the clearing corporation to the broker is only for 400 shares. 

Clearing members are expected to open clearing accounts with certain banks specified by the clearing corporation as clearing banks. They are also expected to open clearing accounts with the depository. They are expected to keep a ready balance for their fund obligations in the bank account and similarly maintain stock balances in their clearing demat account.

Once the clearing corporation informs all members of their obligations, it is the responsibility of the clearing members to ensure that they make available their obligations (shares and money) in the clearing corporation’s account. Once these obligations are done the balance of payments takes place and all the investors will have their stocks/financial instruments/shares in their demat account if a buy trade is executed and cash will be credited to their demat accounts if sale trade is executed. On every end of day basis the clearing corporation generates various reports that need to be circulated to exchanges and custodians.