What is exchange clearing and what is it for?
Sometimes, when looking at a brokerage company's licenses, you notice that in addition to a license to trade currencies and securities, there is also a license for clearing.
Clearing is a system of mutual settlements between participants in exchange trading that ensures guaranteed execution of transactions.
There are two main types of clearing:
Centralized clearing : In this case, all settlements for transactions are carried out through a centralized clearing house.
The clearing house acts as a buyer for every seller and as a seller for every buyer. This ensures that trades are executed even if one of the trading participants defaults.
Decentralized clearing : in this case, settlements for transactions occur directly between trading participants.
The main functions of clearing:
Guarantee of trade execution : Clearing provides a guarantee that all trades concluded on the exchange will be executed.
Risk reduction : Clearing reduces risks 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.
Settlement of transactions: Clearing carries out settlements of transactions, 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 settlements of securities transactions.
- For derivatives: This type of clearing is used to settle derivative transactions.
- For foreign exchange transactions: This type of clearing is used for settlements on foreign exchange transactions.
Working with a broker with a clearing license increases the security of your trades and often reduces their costs. These companies typically offer a wider selection of trading assets and better trading conditions.
But at the same time, you shouldn't get too carried away searching for such companies, as this is just an additional bonus, and not a determining factor in your choice.
