Clearing

Clearing

Clearing of trades takes place through a clearinghouse that abides by strict compliance of all trade regulations and commitments undertaken on the exchange. Their main responsibility of tracking all the transactions of the day leads them to calculate the net position of each member. Going further, the clearinghouse is additionally accountable for

• Timely settlement.
•  Trade registration and follow up.
• Monitoring open interest.
• Financial clearing of all payments
• Fulfilling the physical settlement (delivery) or financial settlement (price difference) of contracts.
• Management of financial guarantees demanded by the participants.

The work at clearinghouses is delegated to a number of members who perform a function in the process of clearing and settling of the commodities traded.

Clearing is the process of reconciling purchases and sales of various options, futures, or securities, as well as the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities ensures the delivery of the security to the buyer. Non-cleared trades can result in settlement risk, and if trades do not clear accounting errors will arise where real money can be lost. An out trade is a trade that cannot be placed because it was received by an exchange with conflicting information. The associated clearing house cannot settle the trade because the data submitted by parties on both sides of the transaction is inconsistent or contradictory.

Similar to broker margin accounts, the clearinghouse members are also supposed to maintain proper levels of margins according to the profits and losses of each day. Depending on the margin balance in their account, funds are either added to the existing amount or it needs to me replenished.

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