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What is clearing?

Financial market participants are exposed to a variety of risks. One of the main risks is settlement risk: the risks that a buyer will not receive their goods or securities, or that a seller will not receive payment, once a transaction has been completed. The volumes in the markets are usually so large that failures of this type can have a major impact on the entire market and can lead to a systemic risk that could be fatal for the financial community. 

Banking clearing is the mechanism that allows financial institutions to settle amounts due and to receive assets corresponding to the transactions they have carried out on the markets. Clearing offers security to the financial markets.

The role of clearing houses is to reduce the clearing risk for participants who are members of the same clearing house. The clearing house acts as an intermediary between the buyer and the seller, who are in fact no longer directly linked by law. The counterparties to the transaction therefore contract directly with the clearinghouse. 

What is an operation by netting? 

Netting is carried out by aggregating all the positions of each member of the clearing house by type of product. This leads to a net balance, either of cash or securities, to be paid or received by each member. 

Watch also the “What is a clearing house?” video

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