Clearing and Settlement

CLEARING AND SETTLEMENT IN CAPITAL MARKETS

Industry standards and practices:
Clearing refers to settling claims of one entity  ( representing  clients) against another. Each entity's operation is responsible for its handling or overseeing the clearing and settlement processes.  The processes involve two primary tasks:

i) trade matching and
ii) settlement(physical delivery of securities or book entry).

a)  For the simple case of cash market trade execution, buyers and sellers record trade details. Brokers and dealers receive confirmations that the trade has been executed and pass on details of the confirmation to clients.  Trade comparison is the second step in the clearing process. Trades are said to be cleared when the buy and sell side records coincide.

b)  Such clearing procedure  does not specifically address the issue of how the price  of,  for example, a particular stock is determined. It merely matches the amount of dollar given against the number of shares as the brokers submit.

c)  In the case of time-sensitive contract such as options, forwards and futures the pricing is subjected to continuous change. Generally, the method  of bid and ask in pricing defines a degree of transparency that minimizes the “spread” between what market participants (floor brokers) expect to pay and or receive as seller.

2. Cost of clearing:

Cost of matching  includes the charge imposed by clearing member plus the exchange's Clearinghouse fees. The latter are classified as follows:
a) For typical commodity,( crude oil, NYMEX per contract),   ranging from $0.45-$3.00
b) For equities, based on # of shares, fees  range from $0.01 to $0.03, one way, for lot (100) shares of stocks.  DTC, US stock  market clearinghouse, additionally charges for the type of trade, i.e., the ratio of buy and sell.


Cost of settlement
a) cost of settlement/ cash offset usually not advertised, due to various factors. For simple settling full amount of cash against number of shares allocated it ranges from $2 to $5 depending on trade activity and number of shares.
b) cost of delivery of stocks varies from $10 for Direct Registration System to $500 actual certificate issued.