Settlement of running account of Client's funds lying with the TM

A running account is a continuous ledger maintained by the TM that records all cash inflows and outflows of a client’s funds on a day‑to‑day basis. Unlike a one‑time settlement, the running account aggregates multiple trades, margin calls and corporate actions until the final settlement date.

The purpose is to ensure that the client’s cash is always available for margin requirements, exercise of options, and settlement of buy‑sell trades. The TM must keep the account balanced, i.e., the total receipts should equal the total payments plus any net cash position that is either payable to or receivable from the client.

In the NISM exam, questions often ask you to identify which party (client, TM, clearing corporation) is responsible for a cash shortfall in the running account. Remember that the TM holds the fiduciary responsibility to settle the client’s cash on the agreed settlement date.

• Running account – continuous cash ledger for a client
• Balancing – receipts = payments + net cash position

Equity derivatives in India follow a T+2 settlement cycle. This means that cash and securities are transferred two business days after the trade date. The TM must ensure that the client’s running account reflects the correct cash position on the settlement date.

On Day 0 (trade date) the TM records the trade in the running account but does not move cash. On Day 1 the TM may receive margin or client funds, and on Day 2 it must make the final cash payment to the clearing corporation (or receive cash if the client sold). Failure to meet the T+2 deadline results in a settlement failure.

Exam questions frequently present a timeline and ask you to calculate the net cash that should be settled on Day 2. Keep the T+2 rule in mind and remember that weekends and public holidays extend the cycle.

The TM acts as an intermediary between the client and the clearing corporation. Its core responsibilities include:

Receipt of Funds: Collecting client deposits, margin calls, and proceeds from sell trades. These receipts are credited to the client’s running account.

Payment of Funds: Disbursing cash for buy‑side settlements, exercise of options, and margin shortfalls. Payments are debited from the running account.

Netting: The TM may net multiple receipts and payments to arrive at a single net cash amount that is settled with the clearing corporation. Netting reduces the volume of fund transfers and operational risk.

• Receipt – cash inflow to running account
• Payment – cash outflow from running account
• Netting – offsetting receipts against payments

Every cash movement is recorded with a unique transaction reference. The TM updates the running account in real time, ensuring transparency for the client and the clearing corporation.

At the end of each business day, the TM performs a reconciliation: total receipts for the day are summed, total payments are summed, and the net cash position is calculated. This net figure is then settled on the T+2 date.

For the exam, you may be given a set of receipts and payments and asked to compute the net cash settlement. Remember to include all items such as dividend payouts, corporate action proceeds, and margin adjustments.

Margin is the collateral required to cover potential adverse price movements. The TM must adjust the client’s running account for both Initial Margin (IM) and Variation Margin (VM).

Initial Margin is collected at the time of trade initiation and is a fixed percentage of the contract value. Variation Margin is calculated daily based on the mark‑to‑market (MTM) change and is either a receipt (if the client gains) or a payment (if the client loses).

Failure to adjust margin correctly leads to a mismatch in the running account, which is a common source of settlement failures. The exam often asks you to identify whether a cash flow relates to IM or VM.

A settlement failure occurs when the TM cannot meet its cash obligation on the T+2 date. SEBI classifies failures as “cash shortfall” or “funds not transferred”. The TM faces penalties, and the client may incur additional costs.

Common causes include insufficient funds in the running account, delayed margin calls, and incorrect bank details. The exam may present a scenario and ask you to pinpoint the root cause.

Mitigation measures mandated by SEBI include daily reconciliation, real‑time monitoring of the running account, and maintaining a minimum cash buffer.

SEBI’s “Depository Participants (DP) and Clearing Members (CM) Regulations” mandate that a TM must maintain a separate client fund ledger, reconcile it daily, and submit a “Daily Settlement Statement” to the clearing corporation.

The TM must also adhere to the “Minimum Net Worth” requirement and keep a cash buffer equal to at least 2% of the aggregate client exposure. Non‑compliance attracts monetary penalties and possible suspension.

For the exam, remember the key compliance points: daily reconciliation, separate client fund ledger, and timely submission of settlement statements.

Reconciliation involves matching the TM’s internal running‑account records with the statements received from the clearing corporation and the client’s bank statements. Any discrepancy must be investigated and resolved before the T+2 settlement.

The TM prepares a “Reconciliation Report” that lists: total receipts, total payments, net settlement amount, and any unmatched items. This report is filed with the SEBI‑approved auditor and shared with the client on a monthly basis.

Exam questions may ask you to identify which document provides evidence of a successful reconciliation. The correct answer is the “Daily Settlement Statement” accompanied by the “Reconciliation Report.”