Clearing

Between the moment a trade is agreed and the moment it settles, when cash and securities actually change hands, several steps must happen. Clearing covers this period. It involves matching and confirming trade details, netting trades so that each party pays or receives only the net amount, and managing the risk of a party defaulting.

In many markets, clearing is carried out by a central counterparty, which becomes the buyer to every seller and the seller to every buyer. This means each trader faces the central counterparty rather than each other, which reduces counterparty risk.

For example, a broker that buys and sells many shares in a single day might owe only a small net amount after clearing, rather than settling every trade separately.

Clearing makes markets safer and more efficient. After the 2008 financial crisis, regulators required many standard derivatives that were previously traded privately to be cleared centrally. Clearing is followed by settlement, the final transfer of securities and cash.