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Settlement failures affect credibility of the Indian market. Here are three concerns

India’s market regulators have spent 30 years building institutional confidence in exchange infrastructure. It rests on one expectation: If a trade is executed on the exchange, settlement will occur.

Earlier this month, following a police complaint about unauthorised Nifty options trades in a client account, National Clearing Ltd.—the clearing corporation linked to NSE—withheld payouts worth roughly Rs 78 crore. The freeze affected hundreds of brokers.

The immediate operational dispute will eventually get resolved. The more important question is institutional: Do trades executed on a stock exchange guarantee settlement? This is not merely a question about one broker, one complaint, or one clearing member. It goes to the heart of what a stock exchange is supposed to guarantee. Market participants can tolerate price volatility more easily than uncertainty about whether trades will settle correctly and on time.

Settlement as the foundation of exchange trading

Modern exchanges are built around the principle of settlement finality. Once a trade is validly executed on the exchange, the clearing corporation steps in as the legal counterparty to both sides through novation. The original buyer no longer depends on the solvency or conduct of the original seller; both now face the clearing corporation. This institutional arrangement is what makes anonymous electronic trading possible at scale.

A trader buying Nifty options does not know who sits on the opposite side of the trade. Nor should they need to know. Confidence in anonymous markets depends on the confidence that the clearing and settlement framework will survive disputes involving individual participants. When that confidence weakens, transaction costs rise everywhere and exchange trading breaks down.

India’s securities market reforms of the 1990s and early 2000s were, in important respects, an attempt to move away from precisely such settlement uncertainty. Under the old “badla” system that prevailed on the Bombay Stock Exchange, settlement obligations were frequently rolled over rather than conclusively........

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