What is exchange clearing and why is it needed?
Sometimes, when looking at the licenses of a brokerage company, you notice that in addition to the license for trading currencies and securities, there is also a license for clearing.
Clearing is a system of mutual settlements between participants in exchange trading, which ensures guaranteed execution of transactions.
There are two main types of clearing:
Centralized Clearing : In this case, all trade settlements go through a centralized clearing house.
The clearing house acts as a buyer to every seller and as a seller to every buyer. This provides a guarantee that transactions will be executed even if one of the trading participants defaults.
Decentralized clearing : in this case, settlement of trades occurs directly between trading participants.
Main clearing functions:
Trade Execution Guarantee : Clearing provides assurance that all trades entered into on the exchange will be executed.
Risk Reduction : Clearing reduces risk for trading participants as they do not bear counterparty risk.
Providing liquidity: Clearing ensures market liquidity as trading participants can easily buy or sell assets.
Trade settlements: clearing settles trades, including the transfer of funds and the transfer of securities.
Types of clearing depending on the asset:
- For securities: this type of clearing is used for settlement of securities transactions.
- For derivatives: this type of clearing is used for settlement of derivatives transactions.
- For foreign exchange transactions: this type of clearing is used for settlements of foreign exchange transactions.
If you work with a broker who has a clearing license , this increases the security of trades and often lowers and often reduces the cost of trades. Typically, such companies offer a larger selection of assets available for trading and better trading conditions.
But at the same time, you should not get too carried away with searching for such companies, since this is just an additional bonus, and not a factor determining the choice.