Unlock the Secrets of Securities, Funds & Futures: A Visual Payment & Settlement Guide

1. Payment, Clearing, Settlement Essence

Essence: Transfer and clearing of ownership, trust/contract relationships, culminating in the final settlement of transaction value.

Funds: Currency, such as bank deposits.

Transfer: Change in ownership or trust/contract rights.

Transfer Tools: Third‑party custodial and depository banks; brokers manage trading instructions and account administration, while banks handle fund custody, transfer, and supervision.

2. Relationship Between Payment, Clearing, Settlement

After understanding the essence of payment, clearing, and settlement for securities, funds, and futures, the relationships are illustrated in the following diagram.

Further expansion distinguishes money as the flow of funds through the banking system and securities as the flow of information (stocks, bonds, contracts, fund units) through the securities registration and settlement institutions.

3. Securities

Broadly, securities are documents representing ownership or creditor rights, such as stocks, bonds, futures contracts, and fund units (originally paper, now electronic).

4. Payment

Payment: Transfer of funds between accounts. In the context of securities, funds, and futures, the term "payment" is imprecise; fund settlement more accurately describes the process of transferring funds and securities ownership after a trade.

5. Clearing and Settlement

Clearing: Calculation of receivable/payable amounts for securities and funds according to defined rules, aggregating results into settlement accounts.

Clearing offsets the quantities and amounts of specific securities, reducing the number of securities or cash that need to be physically delivered, thereby saving resources.

Settlement: Based on clearing results, securities and funds are transferred to fulfill related obligations.

6. Fund Accounts

Fund accounts are dedicated intermediate stations opened by brokers, fund companies, or futures firms for investors' specific investment transactions, linking investors' bank cards to the investment market and ensuring dedicated use, risk isolation, and efficient clearing.

1) Securities Fund Account: Opened at a securities firm to hold settlement funds – essentially a "wallet" for stock trading money.

2) Fund Fund Account: Virtual account opened at a fund sales institution; actual funds are custodial in a commercial bank.

3) Futures Fund Account: Dedicated account at a futures firm for margin and settlement, handling profit/loss and margin changes.

7. Trading Accounts

Trading accounts are opened by investors at brokers, fund companies, or futures firms to record holdings of stocks, fund units, futures contracts, bonds, etc. The opening process mirrors that of fund accounts.

8. Third‑Party Custody

When investors open accounts, they must bind a bank card, signing a third‑party custody agreement. Commercial banks act as independent custodians, holding investors' settlement funds and separating them from securities.

Background: Before 2006, the securities industry used an independent broker custody model, leading to frequent fund misappropriation (e.g., Southern Securities bankruptcy).

Solution: Third‑party custody eliminates fund misuse, safeguards assets, isolates risk, and prevents systemic financial risk.

9. Bank‑Securities Transfer

After opening accounts and signing third‑party custody, the next step is bank‑securities transfer, illustrated below.

Key Points:

Broker side: Sends client name, ID, bank card number, amount, currency, etc., to China Clearing and the bank.

Bank side: Verifies client information, checks account status and balance, then debits the client’s bank account and credits the broker’s settlement fund sub‑account.

10. Securities‑Bank Reverse Transfer

Reverse flow (bank to securities) follows a similar verification and settlement process.

11. Core Participants in the Securities Market

China Clearing: Central securities depository and settlement institution, handling registration, custody, clearing, and settlement.

Securities Exchanges: Provide trading platforms and forward data to China Clearing.

Securities Firms: Act as agents for investors and as clearing participants with China Clearing.

Third‑Party Custody Banks: Safeguard client margins and provide fund transfer services.

Investors: Individual and institutional participants.

12. Business Scenarios and Terminology

1) Stock Trading (core scenario): Uses a T+1 rolling settlement model.

T‑day (trading day): Investor trades, exchange matches orders.

T‑day end: China Clearing, as CCP, performs multilateral net settlement.

Key Concept – DVP (Delivery Versus Payment): Funds and securities are exchanged simultaneously; if a participant defaults, the settlement institution can withhold delivery.

13. Fund Business Scenarios

Fund payment, clearing, and settlement revolve around subscription, redemption, and dividend processes, with distinct information and fund flows.

Key points:

Principle: Securities use DVP; funds and securities settle together. Funds flow is separated from information flow.

Cycle: Securities T+1 settlement; funds T+2 (subscription) or T+3‑T+5 (redemption).

14. Futures Payment, Clearing, Settlement

Futures rely on margin systems and daily mark‑to‑market settlement, with cash or physical delivery.

Margin: A fraction of contract value posted as performance guarantee, enabling leveraged trading.

Mark‑to‑Market: Daily profit/loss calculation based on settlement price, ensuring no‑negative‑balance positions.

15. Participants in the Futures Market

Futures Exchanges: Provide trading platforms and act as central counterparties.

Futures Companies: Manage client margins, risk, and act as clearing members.

Futures Market Monitoring Center: Unified account opening, margin monitoring, and investor services.

Margin Custody Banks: Safeguard client margins and handle fund transfers.

Investors: Individual and institutional participants.

16. Core Takeaways

All scenarios revolve around the "trade‑clear‑settle" chain. Central counterparties (CCP) provide risk firewalls for securities and futures. DVP is the gold rule for securities settlement. Daily mark‑to‑market is essential for futures risk control. Third‑party custody, fund custodians, and margin monitoring ensure separation of client funds from institution assets, protecting investor safety.