Clearing and Settlement
Timely and reliable clearance and settlement are the foundation for a safe and efficient trading environment. Automated post-trade procedures result in fewer inaccuracies, lower transaction fees and operational and fail costs. Automation and the capacity of real-time settlement are essential in meeting the complex requirements of substantial increase in transactions and the emphasis on risk reduction. This chapter describes the post-trade process that begins from a trade ticket to the back office and to clearing corporations. The major clearing corporations covered in this chapter include Government Securities Clearing Corporation, National Securities Clearing Corporation, International Securities Clearing Corporation, Mortgage-Backed Securities Clearing Corporation, Cedel Bank, and Euroclear. This chapter also lists toprated global custodians and the top-rated agent banks in emerging markets.
Clearing is processing a trade and establishing what the parties to the trade owe each other. Settlement is the transfer of money and securities between the parties so the transaction is completed. Clearing and settlement are usually referred to as back-office operations. Most Wall Street firms hire a clearing bank to do receiving and delivering of money and securities for them. Hence, one of the main functions of a dealer's back office is to give accurate instructions to the clearing bank to effect the trade. A securities firm's money and securities accounts at its clearing bank together make up its clearing account. Securities in the clearing account are referred to as its box position.
The significance of back-office operations is clearly manifested by the snafu that occurred at the Bank of New York (BONY) in November 1985. During a computer malfunction, BONY could accept deliveries of securities but it could not make them. BONY had to borrow $22.5 billion from the New York Fed to cover the shortfall created by this situation.
The first step in the clearing and settlement process involves conveying the details on the trade ticket to the back office. The second step is to compare and match between the purchaser and the seller to ensure that they agree on what is to be transacted and on what terms. The final phase is to deliver what has been promised in the trade.
Every trade ticket must contain certain basic information. The trader must write down on the ticket whether the order is to buy or to sell, the quantity of the transac
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Publication information: Book title: The Business of Investment Banking. Contributors: K. Thomas Liaw - Author. Publisher: Wiley. Place of publication: New York. Publication year: 1999. Page number: 261.