Clearing and settlement are fundamental parts of the trade life cycle. It’s what keeps the financial markets ticking!
Clearing refers to everything that happens once an agreement to make a trade has been made. It involves the exchange and confirmation of information and reporting on the trade in order to prepare for settlement.
Settlement is the actual handover of a purchased asset and the agreed cash for it. The documents of ownership etc., cash for the asset etc. are handed over on the agreed settlement date (the date in the contract on which these exchanges must take place).
These processes are put in place to ensure the terms of the agreement for a transaction are met fully by both parties – the buyer and the seller, and that there is transparency in the trading process.
Safe as clearing houses
This is, alas, nothing to do with spring cleaning. Clearing houses are third party financial institutions that provide these clearing and settlement services to facilitate the exchange of all types of asset classes in the industry. A clearing house acts as a middleman and risk management body for clearing firms (firms, usually investment banks, which carry out these clearing services), taking on the risk that the terms of a trade won’t be met by one or both of the parties involved. If a settlement does fall through, it may be that the clearing house will have to cough up the cash itself to cover it.
Some clearing houses specialise in a particular market such as the futures market or the derivatives market, or sometimes in a certain geographical region or country. The time it can take to see through clearing and settlement on a particular asset can vary greatly, depending on what it is. It could take mere seconds if it’s automated, or perhaps days, even weeks.
A lot of the clearing process can now be automated and is carried out over complex electronic systems. However, there is still a necessity for humans!
Roles in clearing
Clearing and settlement specialists can work for a clearing house or the operations division of an investment bank, working on all kinds of asset classes. They oversee the smooth and efficient transfer of their clients’ assets for trades.
This involves plenty of correspondence via telephone, email and meetings with the brokers and sales desk in the front office, custodians, the client and the representatives of the counterparty who is either buying the client’s asset or selling an asset to them. There’s also lots of administrative work to ensure all details of a trade are sent to the right people, reported in the right way, and that the exchange takes place on time and correctly.
More on responsibilities
As part of the clearing process, a responsibility of some specialists is to communicate with the custodian. The custodian is a financial institution that keeps a client’s assets safe. A bit like Gringotts…without all that magic and dragons business. Analysts will let them know the details of the trade, for example which asset will be bought or sold, how much for etc. They have to let them know when to deliver the asset being traded, or when to expect it to be deposited into a particular account.
Investment banks also tend to offer these custody services to their clients, so some roles will administer the delivery/release of documents and make sure assets or cash moves in and out a client’s account when necessary. Settlement deadlines must be met when doing this, and it’s vital that any outgoing cash is deposited into the right account.
Everything must be documented to a tee; with all the right standards upheld for reporting to regulatory bodies, and so clearing and settlement specialists will be responsible for making sure this is done in the correct manner.
Operations roles require high levels of accuracy, organisation and attention to detail. It’s essential that everything is kept running smoothly, and deadlines are a feature of day-to-day work, for example in chasing payments to ensure it’s all settled on time. There’s often an international dynamic to work too; trades are regularly cross border deals and so clearing and settlement specialist often work against time zone differences, corresponding with other operations teams across the world and getting them to pick up problems, and vice versa, to be resolved ‘overnight’, so that deadlines can still be met.
Some roles can, alternatively, focus on making these processes more efficient, working in teams to come up with new ways of doing things and even automating some processes. This involves a lot of project work.
Salaries don’t hit the highs of the front office pay packets in operations roles; however they can still be pretty generous, plus hours can be much more regular and sociable compared to the front office bunch’s timetable! Opportunities tend to be more open to graduates from any degree background, too.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.