In finance, the term clearing refers to the processing of a financial transaction. It may include administration, fulfillment of legal obligations, the application of various regulations and the settlement of payment.
Put simply, clearing is the act of insuring that people get paid for goods or services rendered promptly in keeping with contracts.
Financial clearing is carried out by intermediaries such as clearing corporations and clearing houses which act as escrow agents. These service providers insure that contractual obligations are met, thus facilitating transactions between parties. They normally accomplish this by requiring all parties to deposit assets with them which can be used to settle their transactions.
In banking, clearing normally involves the settlement of debt between banks. Each bank holds an account with a clearing house, which transfers money between accounts to settle accounts.
Example: You use your debit card to pay for a 100 Swiss franc purchase from a store. The purchase is recorded by the clearing house, which transfers the 100 francs from the money from your bank’s deposit at the clearing house to the store’s bank’s deposit at the clearing house. This allows transactions to be processed very quickly because a single service provider handles the transaction.
In trading, clearing houses or corporations ensure that all parties meet their payment obligations and receive their money. Typically, brokers which participate in exchanges are required to maintain accounts with a clearing corporation and to hold a minimum amount of assets in those accounts. The clearing house transfers assets from the deposit of the broker who made a purchase to the deposit of the broker who made the sale. In this way, brokers can rest assured that they will receive payment for sales in keeping with contracts.
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