PASS Securities Operations and Risk Management Examination Difficulty: Intermediate 2 Questions   5 min read
📌 Chapter 5.6 — CLEARING PROCESS

Consider a busy Wednesday in your firm’s risk department, where you are monitoring aggregate exposure across several Trading Members (TMs) linked to your Clearing Member (CM) ID. A sudden surge in market volatility has prompted an urgent review of all open positions to ensure that your firm’s margin deposits with the Clearing Corporation are sufficient to cover the aggregate risk.

You have one TM aggressively taking long positions while another TM, operating on a different strategy, is simultaneously building a large short position in the same contract. The challenge is determining the net open position that the Clearing Corporation will ultimately see and bill for margin.

In the Indian clearing ecosystem, the Clearing Corporation treats the Clearing Member as the primary entity responsible for the aggregate performance of all its associated TMs and their clients. To calculate the Net Open Position, you must aggregate the proprietary positions of your TMs alongside the collective net position of all their retail and institutional clients.

If TM PQR holds a long position of 5,000 units and its clients under the same TM hold a net short of 3,000 units, the TM’s net exposure is positive 2,000. When you sum these net figures across all your registered TMs, the Clearing Corporation arrives at a final number that determines the collateral requirement for your firm.

This calculation is not merely an academic exercise; it is the fundamental basis for your daily margin reporting and potential penalty avoidance. If you miscalculate the netting—specifically by failing to distinguish between proprietary accounts and client accounts—you may report an incorrect exposure to the Clearing Corporation. This mismatch can trigger an unintended margin call, forcing you to move liquidity from your clearing bank account unnecessarily, or worse, leaving you under-collateralized and vulnerable to a SEBI penalty for inadequate risk coverage.

For a professional in the back office, the goal is to view the entire firm as a single portfolio for the Clearing Corporation, even while you maintain granular, segment-wise accounting for each individual client. By maintaining accurate real-time snapshots of these net positions, you ensure that the firm’s capital is optimized, preventing the ’locking up’ of excess funds that could be better utilized elsewhere.

Think of your role as the accountant of risk; your ability to correctly net these positions is what keeps the firm’s operations fluid and compliant within the T+1 settlement environment.

Nuance

⚠️ Nuance
A common pitfall for candidates is assuming that proprietary positions and client-level positions are netted against each other across different Trading Members arbitrarily. In reality, the Clearing Corporation mandates a strict hierarchy where individual client positions must be netted at the client level first, and proprietary positions are treated distinctly. Candidates often struggle when they fail to apply the sign convention—treating longs as positive and shorts as negative—which leads to errors in calculating the absolute net exposure for the entire Clearing Member pool.

Check Your Understanding

Practice Question 1

A Clearing Member (CM) supports two Trading Members (TMs). TM Alpha has a net proprietary position of +4,000 and a net client position of -1,500. TM Beta has a net proprietary position of -2,000 and a net client position of -500. What is the CM’s total net open position for this contract?

Practice Question 2

Why must a Clearing Member maintain a precise calculation of the net open position across all its Trading Members?

This is a companion read for Section 5.6 — CLEARING PROCESS from PASS Securities Operations and Risk Management Examination by Akhilesh Gururani, available on Amazon Kindle.

Copyright © 2026 `Akhilesh Gururani. All rights reserved.