Clearing

What is Clearing?

The clearing is defined as the process of combining the purchase and sale of different investment products, especially futures, options, and other types of financial securities. It also involves the transfer of funds from one Bank to another. The clearing process confirms the availability of the securities or the amount that’s to be transferred between different financial institutions, records these transactions digitally and confirms the delivery of all kinds of securities to the investor.

It is extremely important for the purchase and sale of securities and other forms of financial transactions to clear, as the unsettled transactions will put you through the settlement risk. If these trades remain unsettled for a long duration, you might end up losing money.

The clearinghouse may or may not settle the trades depending on the data shared between the financial institutions and how the process is executed. If the parties Fail to submit accurate data, then the latter might not settle the requested trade. The clearing house is also in charge of determining whether or not the parties exchanging securities have sufficient funds in their accounts to process the transaction.

In other words, they act as the middleman who ensures that the trade takes place as smoothly as possible. Basically, when someone sells shares to the investors, they want to be assured that they will receive money for the number of shares they are selling. That’s what the clearing firms help them achieve. At the same time, they also ensures that the investor who’s planning to buy the stocks has sufficient resources and money to fund the investment.

Types of Clearing in Banking

The clearing isn’t always associated with stock tradings; in fact, it could have different meanings depending on the type of transaction. For example, check clearing is the process in which the amount mentioned on the check is transferred to the recipient’s account as promised. The bank might hold the transaction for a short while, as the check clearing is not an instantaneous process, and it might take some time for the bank to ensure that every detail is accurate.

The clearing is quite useful in the stock Market, as it allows each party to make the transaction through the clearinghouse and leave the accuracy and other vital functions to them instead of conducting the research manually. Not only does it guarantee smooth and efficient transactions, but clearing helps with the settlement of almost all types of financial trades – be it the securities exchanged between two parties or the check clearance.

1. Clearing House in Banking

It is a system where checks are cleared. A banker's clearing house is a place where checks are received from customers and are presented & cleared. Some are computerised clearing houses and a few manual clearings.

2. Clearing in Histopathology

In histopathology, the clearing process helps eliminate alcohol from tissues. The clearing agents are used for the effective removal of alcohol, which is then replaced with other fluids.

3. Clearing in Agriculture

Land clearing is defined as the process of clearing the forests and other agricultural lands that served as the habitat for plants and animals. The land is cleared so that it is ready for agricultural purposes.

Clearing Process

The trades are validated once they are settled by the clearinghouse, the intermediary that’s responsible for settling trades after thorough evaluation. However, the clearinghouse charges a small percentage of fees for verifying the trades and settling the deals for investors. Usually, the fee is included in the commission charged by the broker, meaning you don’t have to pay the fees separately. This fee is used for facilitating the transactions and settling trades as requested by the investors.