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Clearing

The process of clearing is reconciling purchases and sales of various futures, options, securities, and other trades from one company (usually a financial institution) to the other.

The companies executing those transactions are called clearing houses. Those clearing houses function as an intermediary for buying and selling transactions. They act as counterpart for both, buyer and seller, for futures, options and certain funds.

Those houses are charging fees for acting as the counterpart, this fee is called clearing fee.

Clearing aims at making the market more efficient. It is regarded as necessary for the matching of all buy and sell orders in the market.

 

Automated Clearing House

An automated clearing house (ACH) is an electronic system used for the transfer of finds between electronic traded funds (ETF). The automated clearing house, again, acts an intermediary through processing the sending and receiving of validated funds between institutions.

 

Use of Clearing

Clearing, especially automated clearing, is often used for direct deposit of employees salary and can be used to transfer funds between an individual and a business mainly in exchange for services. This process is often referred to as an electronic check, as it provides the same informational a traditional written check.

Other uses of clearing heavily depends on the underlying trade (like futures, securities and others)

 

The Clearing Market

Most of the big clearing houses are located in London, those houses currently clear about €1.93 trillion each year. More than 90% of all clearing transactions are in Euros, followed by CHF and the British Pound Sterling. The main underlying instrument being cleared in London are swaps (a derivative contract through which two parties exchange a financial instrument). They account for over 70% of all clearing transactions. While clearing swaps the house acts an intermediary and is therefore right in between the seller and the buyer. It organises and temporarily holds the instruments before they are exchanged.

 

For any further information or question about Clearing, do not hesitate to contact us.

WHU-Finance Society e.V.