Bureaucracy is what makes a trade cycle – and many other cycles from our economy – to last longer on paper than in reality. For this particular reason, central clearing is an essential process that allows accurate monitoring of transactions, under specific financial regulations, throughout the entire process. From the initiation of the transaction until the final settlement, the process will be debated in here.

In order to understand the types of actions monitored through central clearing, one should have a better understanding of the trade chain. To sum up, it all starts with two investment firms. Each of them collaborates with an executing broker and with a custodian. The executing broker has two main responsibilities – to supervise exchanges, ECNs and ATSs on one hand, and to collaborate with a clearing broker on the other hand. The clearing broker works with the custodian. And the chain is continued, from the exchanges towards the DTC, which is formerly represented by DTCC and NSCC. The connection is pretty complicated when not put on paper.

Now that we have summed up the schematic of the process, we can detail it. We have initially specified that two investment firms are involved. Obviously, one intends to buy and the other one intends to sell. The orders that each one makes are directed to the executing broker in charge, who addresses them to the most suitable marketplace for that specific security. As a response, the broker receives a so-called fill and all the fills are given to the clearing brokers.

When two clearing brokers of the same market have an offer, they have to compare each other’s offer and determine whether there is a match in terms of money or shares. This is where financial regulations interfere.

While the initial comparison is called street side matching, the one performed by the custodians of the two firms is the customer side matching. Once the trade officially performed, within 3 days the settlement will be formalized. During all that time, a series of activities were performed: reporting respectively monitoring, evaluating the risk margining or simply netting the trade and tax or failure handling.

Since trade is all about the money, several different payment systems may be involved. Most of them are under the authority of SIPS, which is the abbreviation from “Systemically Important Payment Systems.” This group of systems defines all the other sub systems that have the capacity of threatening the operation process on the entire economy. Payment clearing systems or RTGS – the abbreviation from Real Time Gross Settlement -, are applied by individual states or countries. However, there is also a European system and pan-European systems of payment such as TARGET2. Given all these complicated terms, one can easily conclude how though clearing can be. And indeed, the process of central clearing together with all the strings that are applied to finances and other major regulations can make this type of transactions rather scary.
Whenever you need to manage central clearing http://www.wbresearch.com/enterprisecollateral/central-clearing.aspx processes or you need help with the appropriate financial regulations http://www.wbresearch.com/enterprisecollateral/MasterClass.aspx, ask help from professional clearing brokers.