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Guilherme Mazui

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What is the Difference Between Clearing and Settlement?

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Clearing and settlement are essential processes in the securities transaction lifecycle. They follow a trade and ensure the correct and timely transfer of funds and securities between the parties involved. The main differences between clearing and settlement are as follows:

  • Clearing: This process comes immediately after the trade, where all the terms of the deal are double-checked, reconciled, and confirmed. Clearing involves network operators routing messages and other information among financial institutions to facilitate payments between payers and payees. It provides smoother and more efficient markets as parties can make transfers to the clearing house, which acts as the intermediary and assumes the role of tacit buyer and seller.
  • Settlement: This is the final stage of a securities transaction, where the transfer of securities and money takes place. Settlement involves exchanging funds between the two banks, while clearing can end without any interbank money movement. In the settlement process, funds move between the recipient’s or sender’s bank account and their bank’s reserves. Settlement systems can facilitate money movement between banks, debiting the sender’s account and crediting the receiver’s account at the central bank directly.

In summary, clearing is the process of verifying and confirming the terms of a deal, while settlement is the actual transfer of securities and money between the parties involved in the transaction.

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  • What is the Difference Between Clearing and Settlement?
  • Comparative Table: Clearing vs Settlement

    • Comparative Table: Clearing vs Settlement

    Here is a table summarizing the differences between clearing and settlement:

    Aspect Clearing Settlement
    Definition Clearing is the process of updating the accounts of trading parties and arranging for the exchange of securities or funds. Settlement is the actual exchange of money, or some other value, for the securities.
    Timing Occurs after the execution of a trade and before the settlement. Occurs after the clearing process, sometimes immediately or later on.
    Funds Transfer Funds move between the recipient's or sender's bank account and their bank's reserves. Involves exchanging funds between the two banks.
    Interbank Money Movement Can end without any interbank money movement. Involves interbank money movement.
    Clearinghouse Central clearing uses a third-party, usually a clearinghouse, to clear trades. Settlement can be facilitated by central banks running interbank settlement networks.
    Types There are 2 types of clearing: bilateral clearing and central clearing. Settlement is the actual exchange of money and securities between the parties of a trade on the market.

    Clearing and settlement are essential processes in the world of finance, ensuring the smooth and efficient transfer of funds and securities between parties involved in a transaction.

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    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.