Clearing is the procedure where financial trades settle; that is, the right and timely transfer of funds to the seller and securities to the buyer. Often with clearing, a specialized organization acts as the intermediary and assumes the role of tacit buyer and seller to reconcile orders between transacting parties. Clearing is essential for the matching of all buy and sell orders in the market. It provides smoother and more efficient markets as parties can make copys to the clearing corporation rather than to every individual party with whom they transact.
Clearing firms provide the underlying glue to transactions between customers of brokerage platforms and the securities markets. But they are not all created equal. Broker-dealers need to pay special focus on choosing a clearing firm, as it represents the most important element of its operational and technology stack.
RQD* Clearing provides the industry’s first custody and clearing solution hosted entirely on cloud-native technology, eliminating all on-premise infrastructure. This means they can quickly and seamlessly enhance the platform, deploy new features and upgrades, mitigate emerging cybersecurity threats and offer a more efficient implementation that scales as you grow. Best of all, their Microsoft Azure-hosted platform offers a superior level of resiliency and redundancy that greatly minimizes downtime.
RQD company delivers clearing and custody solutions that provide the scalability, flexibility and cloud technology required to advance.
Clearing is the correct and timely transfer of funds to owner and securities to the purchaser.
A specialized organization often acts as an intermediary known as a clearinghouse and assumes the role of tacit buyer and seller to reconcile orders between transacting parties.
Clearing is necessary to match all buy and sell orders to ensure smoother and more efficient markets.
When trades don’t clear, the resulting out deals can cause real monetary losses.
The clearing process protects the parties involved with a transaction by recording the important points and validating the availability of funds.
How Clearing Works
Clearing is the process of reconciling purchases and sales of varied options, futures, or securities, and the direct transfer of funds in one loan company to another. The process validates the availability of the appropriate funds, records the copy, and regarding securities, ensures the delivery of the security to the buyer. Non-cleared trades can cause settlement risk, and, if investments do not yet determined, accounting errors will arise where real cash can be lost.
An out trade is a trade that cannot be positioned because it was received by an exchange with conflicting information. The associated clearinghouse cannot settle the trade because the info submitted by parties on both sides of the transaction is inconsistent or contradictory.
Stock exchanges, like the New York Stock Exchange (NYSE) and the NASDAQ, have clearing firms. They ensure that stock traders have enough money in their account, whether using cash or broker-provided margin, to finance the trades they are taking. The clearing division of the exchanges acts as the middle man, helping facilitate the smooth transfer of funds.
When an investor sells a stock they own, they would like to know that the money will be delivered to them. The clearing organizations ensures this happens. Similarly, when someone buys a stock, they need to be able to afford it. The clearing firm makes certain that the suitable amount of funds is set aside for trade arrangedtlement when someone buys stocks.
For futures and options, a clearinghouse functions as an intermediary for the transaction, acting as the implicit counterparty to both buyer and seller of the future or option. This extends to the securities market, where the stock exchange validates the trade of the securities to settlement.
Clearinghouses charge a payment for his or her services, known as a clearing fee. When an investor pays a commission to the broker, this clearing charge is often already contained in that commission amount. This cost supports the centralizing and reconciling of transactions and facilitates the proper delivery of purchased investments.
When a clearinghouse encounters an out trade, it offers the counterparties the opportunity to reconcile the discrepancy independently. If the parties can resolve the matter, they resubmit the trade to the clearinghouse for appropriate settlement. But, if they can not agree on the conditions of the trade, then the matter is sent to the appropriate exchange committee for arbitration.