A clearing house performs both clearing and settlement as part of the trading of securities.
The clearing and settlement process is divided into three steps:-
In order to keep the smooth operation of the trading of securities within financial markets, it is crucial that a strong clearing and settlement system is put in place.
- The first step in the clearing and settlement process is Trade Execution, in which you carry out the purchase or sell order. This takes place on TDay.
- The second step in the process, clearing, happens after the trade is executed but before the transaction is settled. In clearing, transactions are netted down (set of buy with sell transactions), buyers and sellers are matched, and confirmations are made so that only a small number of transactions need to be completed. T+1 Day is used for this.
- The final step of the process is settlement, during which the clearing house will give the buyer ownership of the securities they purchased and give the seller money as payment or the money is transferred from the buyer to the seller and the shares are transferred from the seller's account to the buyer's account. T+2 Day is used for this.
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