Electronic Clearing Services

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Clearing services are intended to facilitate funds transfer and liquidation after a transaction has been affected. A neutral third party, also called a central counter party, acts as intermediary between buyers and sellers with the intention of eliminating counter-party risk by holding documents, securities or other pertinent items until contractual conditions are met by all parties.

Electronic clearing services are identical but affected electronically, facilitating electronic trades. Electronic clearing services are offered by clearing houses such as The Clearing Corporation, Options Clearing Corporation, The Depository Trust & Clearing Corp., the CME Clearing House and others.

The clearing process begins with the execution of a trade through an electronic trading system. Once executed, the electronic trading system submits the transaction to the clearing service, which verifies that the specific terms of buyer's and seller's trade records match correctly [1]. For a successful match to occur a ‘sell’ must exist for every ‘buy’ and all critical information required by the match process must correspond exactly between the two sides of the trade.

Once a trade is matched, a guarantee takes effect with the clearing service acting as a buyer to every seller and as seller to every buyer, a process known as novation. Reports are then automatically and electronically transmitted to participant firms' computer systems. Transfer of ownership is conditioned on the simultaneous transfer of sufficient funds to pay in full for the instrument.

Other electronic clearing services include providing risk management, margining and collateral management practices to organized derivatives markets

Vertical Clearing[edit]

Vertical clearing is a description applied to clearing services that are owned, operated and integrated into the exchange or bourse. An example is the CME Clearing House.

Utility Clearing[edit]

Utility clearing is a description applied to clearing services, such as those offered by the Options Clearing Corporation, which are offered on a not-for-profit basis and serve multiple exchanges or bourses.

References[edit]

  1. Clearing and settlement demystified. Federal Reserve Bank of Chicago.