Clearing

Reviewed by Bhavana | Updated on Aug 27, 2020

Introduction

Clearing is the process by which financial transactions are settled - that is, the accurate and timely transfer of funds to a seller and a buyer's securities. A specialized organization often acts as an intermediary with clearing, and assumes the role of tacit buyer and seller in a transaction to communicate orders between the transacting parties. Clearing is important for all buying and selling orders on the market to suit.

What Are The Basics of Clearing?

Clearing is the method of reconciling purchases and selling of different options, futures, or shares as well as the transfer of funds directly from one financial institution to another. The process reinforces the availability of the appropriate funds, records the transfer and ensures that in the case of securities, the security is delivered to the buyer.

Non-cleaned trades can lead to settlement risk, and where trades do not make easy to identify mistakes can occur where real money can be lost. An out trade is a transaction that cannot be imposed, since an exchange with contradictory details obtained it. The related clearing house can not settle the trade because the data on both sides of the transaction provided by the parties is inconsistent or contradictory.

Clearing can be of a variety of meanings depending on the instrument it is associated with. In the event of check clearing, it is the mechanism involved in the transfer to the receiver 's account of the funds promised on the check. Some banks keep funds deposited by check because the transfer is not immediate and can take time to process.

What Are Clearing Houses?

With respect to futures and options, a clearing house acts as an intermediary for the trade, serving as the tacit counterparty for both the future or option buyer and seller. It applies to the capital market, whereby until the settlement the stock exchange validates the capital trade.

Clearing houses charge their services a fee, called a clearing fee. When an investor pays the broker a commission, this clearing fee is also already part of the commission sum. This fee encourages transaction centralization and reconciliation, which promotes the effective distribution of purchased investments.