Trading broker and clearing broker


The member firms have financial responsibility to the clearinghouse for the transactions that are cleared. It is the responsibility of the member firms to ensure that the securities are available for transfer and that sufficient margin is posted or payments are made by the customers of the firms; otherwise, the member firms will have to make up for any shortfalls.

If a member firm becomes financially insolvent, only then will the clearinghouse make up for any shortcomings in the transaction. For transferable securities, the clearinghouse aggregates the trades from each of its members and nets out the transactions for the trading day.

At the end of the trading day, only net payments and securities are exchanged between the members of the clearinghouse. For options and futures and other types of cleared derivatives, the clearinghouse acts as a counterparty to both the buyer and the seller, so that transactions can be guaranteed, thereby virtually eliminating counterparty risk.

Additionally, the clearinghouse records all transactions by its members, providing useful statistics, as well as allowing regulatory oversight of the transactions. Settlement is the actual exchange of money and securities between the parties of a trade on the settlement date after agreeing earlier on the trade.

Most settlement of securities trading nowadays is done electronically. In futures , settlement refers to the mark-to-market of accounts using the final closing price for the day. A futures settlement may result in a margin call if there are insufficient funds to cover the new closing price.

Modern day settlement and clearing evolved as a solution to the paper crisis of securities trading as more and more stock and bond certificates were being traded in the 's and 's, and payments were still made with paper checks. Brokers and dealers either had to use messengers or the mail to send certificates and checks to settle the trades, which posed a huge risk and incurred high transaction costs. At this time, the exchanges closed on Wednesday and took 5 business days to settle trades so that the paperwork could get done.

The 1 st solution to this problem was to hold the certificates at a central depository — sometimes referred to as certificate immobilization —and record change of ownership with a book-entry accounting system that was eventually done electronically.

In Europe, Euroclear and Clearstream are the major central depositories. The process of eliminating paper certificates entirely is sometimes referred to as dematerialization.

Thereafter, all the processes that lead up to settlement is referred to as clearing, such as recording the transaction. Settlement is the actual exchange of money, or some other value, for the securities. Clearing is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities. There are 2 types of clearing: In bilateral clearing , the parties to the transaction undergo the steps legally necessary to settle the transaction.

Central clearing uses a third-party — usually a clearinghouse — to clear trades. Clearinghouses are generally used by the members who own a stake in the clearinghouse. Members are generally broker-dealers. Only members may directly use the services of the clearinghouse; retail customers and other brokerages gain access by having accounts with member firms. The member firms have financial responsibility to the clearinghouse for the transactions that are cleared. It is the responsibility of the member firms to ensure that the securities are available for transfer and that sufficient margin is posted or payments are made by the customers of the firms; otherwise, the member firms will have to make up for any shortfalls.

If a member firm becomes financially insolvent, only then will the clearinghouse make up for any shortcomings in the transaction. For transferable securities, the clearinghouse aggregates the trades from each of its members and nets out the transactions for the trading day. At the end of the trading day, only net payments and securities are exchanged between the members of the clearinghouse.

For options and futures and other types of cleared derivatives, the clearinghouse acts as a counterparty to both the buyer and the seller, so that transactions can be guaranteed, thereby virtually eliminating counterparty risk. Additionally, the clearinghouse records all transactions by its members, providing useful statistics, as well as allowing regulatory oversight of the transactions. Settlement is the actual exchange of money and securities between the parties of a trade on the settlement date after agreeing earlier on the trade.