HOW CLEARING AND SETTLEMENT WORKS?

Many kinds of organizations are involved in clearing and settlement. Their functions vary from market to market, and not all of these organizations exist in every country. For instance, clearinghouse play a key role in the United States and some Asian markets; but in many European markets, depositories are more important.

A key role of a clearinghouse is to assist in the  comparison of trades and sometimes, as in the  United States, also to remove counterpart risk from the settlement process. Clearinghouses can provide the buyer with a guarantee that he will receive the securities–or other interest-he purchased, and provide the seller with a guarantee that the payment will be received.

In the United States, the clearinghouse has a number of working relationships, or interfaces, with other institutions (figure 5-l). A trade in the United States (as well as in Japan, Canada, and some other countries) cannot settle through the central systems until it has been matched, i.e., buyers’ and sellers’ records of the trade are compared and reconciled. A

clearinghouse has an interface with a market in which trades are executed and from which the clearing house receives information on the trades.

The clearinghouse may receive previously “locked in’ ‘ trades (trades which have already been matched), or it may match the trades itself play a key role in the United States and some Asian markets; but in many European markets, depositories are more important.. 

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