Clearing
Tue, Apr 15Clearing is a process that takes place from the moment a trade is agreed upon until the trade is settled. It encompasses the verification of trade details, the netting of trades between parties, and a guarantee of the trade's execution.
Here are the key components of clearing:
Trade Confirmation: Once a trade is executed, both parties involved receive a confirmation that outlines the specifics of the trade, including the price, size, and terms of the transaction.
Netting of Trades: Clearing also includes netting, which simplifies the obligations of a party by consolidating all buy and sell orders. For example, if a trader executes 50 trades in a day (some purchases and some sales), netting would combine these transactions into a single total that the trader owes or is owed.
Guarantee of Performance: Clearing houses play a vital role in the clearing process. These organizations act as intermediaries in trades, standing between the buyer and seller. The clearing house ensures that each party fulfills its obligations. If one party defaults or cannot meet the trade terms, the clearing house intervenes and absorbs the loss, thereby minimizing the risk for the other party.
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