Clearing

In the worlds of finance and banking the activity of clearing encompasses all activities from the time an initial commitment to complete a transaction is made until that transaction is finally settled

Many markets have established what are known as clearing houses which have the specific responsibility of administering the clearing activities of the specific market or exchange. The necessity for clearing has emerged due to the fact that the speed and frequency of market trades in the modern, technology based economy are completed far faster than the time required to complete the recording and billing of such transactions.

Clearing activities in their broadest sense relate to the management of post-trading, pre-settlement and credit exposures, their aim being to ensure that all trades are executed in accordance with the rules of the particular market even if a buyer or seller of the financial instrument becomes insolvent prior to the settlement of a particular trade.Clearing activities are made up of several processes and these can be divided into the following broad categories: - reporting and monitoring of trades, risk margining, netting of trades down to a single position, tax handling and the handling of failed trades.

Clearing assists in building confidence in a particular market as all trades are in effect conducted with the market itself and not directly with a counterparty. In this way, clearing assists in reducing counterparty risk for the members of its exchange. This counterparty risk is reduced by the financial strength of the exchange itself and the margins each member lodges with the exchange to support its trading activities.

In addition to financial markets, the banking system also engages in clearing activities through which each banks liabilities to other banks within the financial system are settled on a daily basis.