Clearing Services in Finance Industry

Written by James Wilson
3 mins, 12 secs Read
Updated On November 22, 2023

The finance industry has been on a great boom for centuries. Except for some short-period of inconveniences and recessions occurring in few intervals, the industry has been fostering and has been gaining popularity for generations. Various innovations and services are getting introduced in this sector, which ensure and assist businesses in their smooth functioning. 

One of which services stands out with full glory is Financial Clearing Services. And the good news is that with the rise of digitization in the generation, you can easily avail of this service by sitting at your home or office. One of the prime and successful examples of this service is the Altrix Edge App. But what is it? and what role does it play to make sure the smooth flow of business operations? To know all about it, follow the writing till the end. 

What is a Clearing Service?

clearing services

When it comes to trade and finance, there is always a risk of some notorious or irresponsible organizations to deal with. It might be the case in an unfortunate situation that the buyer buys a product from you, but now the amount agreed between you and the buyer is not transferred to your business. Things can go vice versa as well. The seller is also the default in providing its products or services. 

To eliminate any such kind of risk and to ensure the smooth functioning of deals, clearing houses provide their services through their clearing operations. The process of reconciliation of both accounts with each other is known as clearing. It ensures the proper transfer of the amount, transfer of the records, and also the proper deliveries of the securities to the buyer so that no side of the trade can practice any ill activity throughout the trade. 

The risk that non-cleared trade carries with it is settlement risks, accounting errors, and losing track of funds. This can lead to the situation of out trade due to incomplete and contradictory data recorded at both points of the trade. In this case, it becomes difficult for even clearing houses to settle down the case. 

Some Clearing Houses

Clearing house

Speaking about the United States of America, clearing houses are a big thing there. There are majorly 2 clearing houses currently operating in the United States of America. National Securities Clearing Corporation (NSCC), which is a subsidiary of the Depositary Trust Clearing Corporation (DTCC), was established in 1976. It was responsible for providing services like clearing, settlement, risk management, and central counterparty services. 

Moreover, the guarantee of completion for certain transactions, virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts were authorized to it. NSCC also nets trades and payments among its participants, reducing the value of payments that need to be exchanged by an average of 98% each day. NSCC is regulated by the U.S. Securities and Exchange Commission (SEC).

The Options Clearing Corporation (OCC) is a clearing house situated in Chicago, Illinois. It specializes in equities derivatives clearing and provides CCP clearing and settlement services to 15 exchanges. Options, financial and commodities futures, security futures, and securities lending transactions are examples of instruments.  The OCC, like other clearing houses, works as a guarantee between clearing parties, ensuring that the commitments of the contracts it clears are met. It presently houses over $100 billion in collateral deposited by clearing members and transfers billions of dollars every day. The cleared contract volume in 2016 was 4.17 billion, the sixth-largest yearly total in OCC history.

How Does Clearing Work?

Clearing houses

It is a complete hassle once your matter gets in a clearing house. Since both parties have contradictory facts presented from their sides. However, still, it is the best and safe way to get your funds or securities out. Speaking about the process, it is clearly not a simple and easy one. There are various guidelines and regulations that change with respect to your situation. 

  1. The clearinghouse secures the availability of cash.
  1. The transaction information is saved.
  1. The monies are kept in a secure location until the transaction is completed.
  1. Disagreements are examined, and the clearing house acts as a middleman.
  1. The money has been cleared, and the security has been transferred to the purchaser.

In essence, the clearance procedure safeguards both parties. The seller wants to sell their products or services while knowing that they will be paid for the transaction. The buyer wants to purchase a security and must offer sufficient finances for this purpose. To guarantee a seamless transaction, the clearing house validates both parties.

Wrapping Up

In conclusion, clearing houses are a great and one of the most crucial organizations that must exist in the world. Clearing houses are the best way to complete a failed or delayed trade and finish the process smoothly.

Author: James Wilson