clearing
The process of reconciling and confirming trade details between buyers and sellers before settlement, managed by clearinghouses to reduce counterparty risk.
Example
“The DTCC clears trillions in securities trades daily, netting positions to minimize actual money movement needed.”
Memory Tip
CLEARING = the process BETWEEN trade and settlement. Confirms, reconciles, and nets transactions.
Why It Matters
Clearing ensures that when you buy or sell securities, the transaction is verified and confirmed before your money or assets change hands. This process protects you from fraud and reduces the risk that the other party will fail to deliver what they promised, giving you confidence that your financial transactions will settle as expected.
Common Misconception
Many people think clearing and settlement are the same thing, but clearing is the verification and reconciliation step that happens first, while settlement is when the actual transfer of money and securities occurs days later. Clearing prepares the transaction for settlement but does not complete it.
In Practice
When you buy 100 shares of stock for $5,000, the clearinghouse verifies that the seller actually owns those shares and that you have the $5,000 available. Over the next two business days, this clearing process confirms all details match between buyer and seller, then settlement occurs when the shares move to your account and $5,000 leaves your bank, reducing the chance either party can back out or disappear with the funds.
Etymology
CLEARING (removing obstacles, resolving) — CLEARING a trade by confirming and matching details before settlement.
Common Misspellings
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See Also
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