Clearing (finance)
Encyclopedia
In banking and finance
, clearing denotes all activities from the time a commitment is made for a transaction
until it is settled
. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction.
In its widest sense clearing involves the management of post-trading, pre-settlement credit exposures, to ensure that trades are settled in accordance with market rules, even if a buyer or seller should become insolvent prior to settlement.
Processes included in clearing are reporting/monitoring, risk margining
, netting
of trades to single positions, tax
handling, and failure handling.
Systemically Important Payment Systems
(SIPS) are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy. In general, these are the major payment clearing or Real Time Gross Settlement
systems of individual countries, but in the case of Europe, there are certain pan-European payment systems. TARGET2 is a pan-European SIPS dealing with major inter-bank payments. STEP2, operated by the Euro Banking Association
is a major pan-European clearing system for retail payments which has the potential to become a SIPS. The Federal Reserve System
system is a SIPS.
The Fedwire
Funds Service provides a real-time gross settlement system in which more than 9,500 participants are able to initiate electronic funds transfers that are immediate, final, and irrevocable. Depository institutions that maintain an account with a Reserve Bank are eligible to use the service to send payments directly to, or receive payments from, other participants. Depository institutions can also use a correspondent relationship with a Fedwire participant to make or receive transfers indirectly through the system. Participants generally use Fedwire to handle large-value, time-critical payments, such as payments to settle interbank purchases and sales of federal funds; to purchase, sell, or finance securities transactions; to disburse or repay large loans; and to settle real estate transactions. The Department of the Treasury, other federal agencies, and government-sponsored enterprises also use the Fedwire Funds Service to disburse and collect funds. In 2003, the Reserve Banks processed 123 million Fed-wire payments having a total value of $436.7 trillion.
The Fedwire Securities Service provides safekeeping, transfer, and settlement services for securities issued by the Treasury, federal agencies, government-sponsored enterprises, and certain international organizations. The Reserve Banks perform these services as fiscal agents for these entities. Securities are safekept in the form of electronic records of securities held in custody accounts. Securities are transferred according to instructions provided by parties with access to the system. Access to the Fed-wire Securities Service is limited to depository institutions that maintain accounts with a Reserve Bank, and a few other organizations, such as federal agencies, government-sponsored enterprises, and state government treasurer’s offices (which are designated by the U.S. Treasury to hold securities accounts). Other parties, specifically brokers and dealers, typically hold and transfer securities through depository institutions that are Fedwire participants and that provide specialized government securities clearing services. In 2003, the Fedwire Securities Service processed 20.4 million securities transfers with a value of $267.6 trillion.
The Automated Clearing House (ACH)
is an electronic payment system, developed jointly by the private sector and the Federal Reserve in the early 1970s as a more-efficient alternative to checks. Since then, the ACH has evolved into a nationwide mechanism that processes credit and debit transfers electronically. ACH credit transfers are used to make direct deposit payroll payments and corporate payments to vendors. ACH debit transfers are used by consumers to authorize the payment of insurance premiums, mortgages, loans, and other bills from their account. The ACH is also used by businesses to concentrate funds at a primary bank and to make payments to other businesses. In 2003, the Reserve Banks processed 6.5 billion ACH payments with a value of $16.8 trillion.
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, clearing denotes all activities from the time a commitment is made for a transaction
Financial transaction
A financial transaction is an event or condition under the contract between a buyer and a seller to exchange an asset for payment. It involves a change in the status of the finances of two or more businesses or individuals.-History:...
until it is settled
Settlement (finance)
Settlement of securities is a business process whereby securities or interests in securities are delivered, usually against payment of money, to fulfill contractual obligations, such as those arising under securities trades....
. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction.
In its widest sense clearing involves the management of post-trading, pre-settlement credit exposures, to ensure that trades are settled in accordance with market rules, even if a buyer or seller should become insolvent prior to settlement.
Processes included in clearing are reporting/monitoring, risk margining
Margin (finance)
In finance, a margin is collateral that the holder of a financial instrument has to deposit to cover some or all of the credit risk of their counterparty...
, netting
Netting
In general, netting means to allow a positive value and a negative value to set-off and partially or entirely cancel each other out.In the context of credit risk, there are at least three specific types of netting:...
of trades to single positions, tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
handling, and failure handling.
Systemically Important Payment Systems
Systemically Important Payment Systems
Systemically Important Payment Systems are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy. In general, these are the major payment clearing systems or Real Time Gross Settlement of individual countries,...
(SIPS) are payment systems which have the characteristic that a failure of these systems could potentially endanger the operation of the whole economy. In general, these are the major payment clearing or Real Time Gross Settlement
Real Time Gross Settlement
Real time gross settlement systems are funds transfer systems where transfer of money or securities takes place from one bank to another on a "real time" and on "gross" basis. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled...
systems of individual countries, but in the case of Europe, there are certain pan-European payment systems. TARGET2 is a pan-European SIPS dealing with major inter-bank payments. STEP2, operated by the Euro Banking Association
Euro Banking Association
The Euro Banking Association is an industry forum for the European payments industry with over 200 member banks and organisations from the European Union and across the world aimed at fostering and driving pan-European payment initiatives...
is a major pan-European clearing system for retail payments which has the potential to become a SIPS. The Federal Reserve System
Federal Reserve System
The Federal Reserve System is the central banking system of the United States. It was created on December 23, 1913 with the enactment of the Federal Reserve Act, largely in response to a series of financial panics, particularly a severe panic in 1907...
system is a SIPS.
United States payment system
The United States payments system is the largest in the world. Each day, millions of transactions, valued in the trillions of dollars, are conducted between sellers and purchasers of goods, services, or financial assets. Most of the payments underlying those transactions flow between depository institutions, a large number of which maintain accounts with the Reserve Banks. The Federal Reserve therefore performs an important role as an intermediary in clearing and settling interbank payments. Banks settle payment transactions efficiently by debiting the accounts of the depository institutions making payments and by crediting the accounts of depository institutions receiving payments. Moreover, as the U.S. central bank, the Federal Reserve is immune from liquidity problems — not having sufficient funds to complete payment transactions — and credit problems that could disrupt its clearing and settlement activities.The Fedwire
Fedwire
Formally known as the Federal Reserve Wire Network, Fedwire is a Real Time Gross Settlement Funds Transfer system operated by the Federal Reserve Banks that enables financial institutions to electronically transfer funds between its more than 9,289 participants...
Funds Service provides a real-time gross settlement system in which more than 9,500 participants are able to initiate electronic funds transfers that are immediate, final, and irrevocable. Depository institutions that maintain an account with a Reserve Bank are eligible to use the service to send payments directly to, or receive payments from, other participants. Depository institutions can also use a correspondent relationship with a Fedwire participant to make or receive transfers indirectly through the system. Participants generally use Fedwire to handle large-value, time-critical payments, such as payments to settle interbank purchases and sales of federal funds; to purchase, sell, or finance securities transactions; to disburse or repay large loans; and to settle real estate transactions. The Department of the Treasury, other federal agencies, and government-sponsored enterprises also use the Fedwire Funds Service to disburse and collect funds. In 2003, the Reserve Banks processed 123 million Fed-wire payments having a total value of $436.7 trillion.
The Fedwire Securities Service provides safekeeping, transfer, and settlement services for securities issued by the Treasury, federal agencies, government-sponsored enterprises, and certain international organizations. The Reserve Banks perform these services as fiscal agents for these entities. Securities are safekept in the form of electronic records of securities held in custody accounts. Securities are transferred according to instructions provided by parties with access to the system. Access to the Fed-wire Securities Service is limited to depository institutions that maintain accounts with a Reserve Bank, and a few other organizations, such as federal agencies, government-sponsored enterprises, and state government treasurer’s offices (which are designated by the U.S. Treasury to hold securities accounts). Other parties, specifically brokers and dealers, typically hold and transfer securities through depository institutions that are Fedwire participants and that provide specialized government securities clearing services. In 2003, the Fedwire Securities Service processed 20.4 million securities transfers with a value of $267.6 trillion.
The Automated Clearing House (ACH)
Automated Clearing House
Automated Clearing House is an electronic network for financial transactions in the United States. ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit payroll and vendor payments. ACH direct debit transfers include consumer payments...
is an electronic payment system, developed jointly by the private sector and the Federal Reserve in the early 1970s as a more-efficient alternative to checks. Since then, the ACH has evolved into a nationwide mechanism that processes credit and debit transfers electronically. ACH credit transfers are used to make direct deposit payroll payments and corporate payments to vendors. ACH debit transfers are used by consumers to authorize the payment of insurance premiums, mortgages, loans, and other bills from their account. The ACH is also used by businesses to concentrate funds at a primary bank and to make payments to other businesses. In 2003, the Reserve Banks processed 6.5 billion ACH payments with a value of $16.8 trillion.
See also
- Central Counterparty ClearingCentral Counterparty ClearingCentral Counterparty Clearing is a process by which financial transactions in equities are cleared by a single counterparty. Please see Clearing for general information about clearing...
- Clearing house (finance)Clearing house (finance)A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions...
- Banker's clearing house
- ClearstreamClearstreamClearstream Banking S.A. is the clearing and settlement division of Deutsche Börse, based in Luxembourg and Frankfurt. Clearstream was created in January 2000 through the merger of Cedel International and Deutsche Börse Clearing...
scandal - SWIFTSwiftThe swifts are a family, Apodidae, of highly aerial birds. They are superficially similar to swallows, but are actually not closely related to passerine species at all; swifts are in the separate order Apodiformes, which they share with hummingbirds...