Clearing
Definition
Trading financial assets creates debit and credit positions. Clearing is the
calculation of the bilateral or multilateral obligations of market participants.
The
term can also cover other activities like trade confirmation.
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Net versus gross settlement
Financial obligations may be settled one by one, that is on a gross basis. They may also be
settled net, whereby only the difference between debit and credit positions is settled.
Settlement netting refers to situations when a clearing house or a securities settlement system
computes positions without taking risk itself.
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Clearing providers
Netting facilities can be provided by
- clearing houses,
- central counterparties,
- securities settlement systems, and
- clearing members
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Clearing houses
A 'clearing house' determines the respective obligations. It calculates the amounts to be
settled. The settlement is typically done through securities settlement systems.
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Central counterparties
'Central counterparty clearing' refers to situations when the clearing house
interposes itself as a buyer to the seller and as a seller to the buyer. Thus
it creates two new
contracts that replace the original single contract. The legal process of replacing
the original counterparties and becoming the single counterparty for all participants
is called 'novation'. CCPs are used by derivatives exchanges, securities exchanges
and trading systems. Recently they have begun to provide their services to over-the-counter
markets.
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Securities settlement systems
Similar to clearing houses, a securities settlement system determines the respective
obligations of buyers and sellers which it then settles.
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Clearing members
Generally speaking, a member of a clearing house (e.g. a custodian bank) may clear, in addition to
its own obligations, those of its clients.
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