Clearing (finance)
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In banking and finance, clearing denotes all activities from the time a transaction is made until it is finally settled (see settlement). Some of the activities in clearing are reporting/monitoring, risk margining, netting of trades to single positions, tax handling, and failure handling. Clearing only involves electronic transactions.
In its wider sense clearing involves the management of post-trading, pre-settlement credit exposures, to ensure that trades are settled in accordance with market rules, even if a buyer or seller becomes insolvent prior to settlement.
Central counterparty
Clearing generally involves the use of a well capitalised financial institution known as a central counterparty (CCP). The CCP becomes a party to every trade, acting as buyer to market participant sellers, and seller to market participant buyers. In respect of unsettled trades, market participants therefore bear the standardised credit risk of the CCP, and not that of each other in a decentralised market.
In the United States, interbank clearing is done through the Automated Clearing House (ACH). Its rules and regulations are set by the National Automated Clearing House Association and the Federal Reserve. The ACH network acts as central clearing facility for all Electronic Fund Transfer (EFT) transactions.
Netting
The CCP can net its daily purchases and sales in like securities since each market participant has only one counterparty to its trades. Such netting is widely identified as the key benefit offered by the use of a CCP.
See also
External links
- [CHIPS Clearing House Interbank Payment System]
- [The Clearing House]
- [Options Clearing Corporation]
- [clearstream in Europe]
- [Eurex Clearing AG acts as a Central Counterparty (CCP)in clearing process]
- [what is ACH?]
- [El clearing, una realidad financial] por ATTAC NGO
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