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Clearing (finance)
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In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled (see settlement). Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction.
In its widest 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 should become insolvent prior to settlement.
Processes included in clearing are reporting/monitoring, risk margining, netting of trades to single positions, tax handling, and failure handling.
Systemically Important Payment Systems (SIPS) are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy.
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Encyclopedia
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled (see settlement). Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction.
In its widest 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 should become insolvent prior to settlement.
Processes included in clearing are reporting/monitoring, risk margining, netting of trades to single positions, tax handling, and failure handling.
Systemically Important Payment Systems (SIPS) are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy. In general, these are the major payment clearing systems of individual countries, but in the case of Europe, there are certain pan-European payment systems. TARGET2 is a pan-European SIPS dealing with major inter-bank payments. STEP2, operated by the Euro Banking Association is a major pan-European clearing system for retail payments which has the potential to become a SIPS.
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 (which they would in a decentralised market). See Central Counterparty Clearing
In the United States, interbank clearing is done through the Automated Clearing House (ACH). Its rules and regulations are set by NACHA-The Electronic Payments Association, formerly the National Automated Clearing House Association, and the Federal Reserve. The ACH network acts as central clearing facility for all Electronic Funds Transfer (EFT) transactions. Interbank clearing of paper checks is done by correspondent banks and the Federal Reserve; they are ultimately settled between the 12 Federal Reserve Banks through the Interdistrict Settlement Fund.
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
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