Exchanges like the New York Stock Exchange (NYSE) and NASDAQ have clearing companies. They make sure that stock traders have enough money in their account, whether with cash or a margin provided by the broker to fund the trades they have accepted. The clearing house of these exchanges acts as an intermediary and helps facilitate the smooth transfer of money. When an investor sells a stock he owns, he wants to know that the money will be delivered to him. Clearing companies ensure that this happens. If someone buys a share, they must be able to afford it. The clearing house shall ensure that the appropriate amount is reserved for the settlement of transactions when a person purchases shares. Let`s take as a hypothetical example that a trader buys an index futures contract. The initial margin needed to maintain this trade overnight is 6,160 USD. This amount is considered „good faith“ insurance that the merchant can afford the trade. This money is held by the clearing company on the trader`s account and cannot be used for other trades.
This helps to compensate for the losses that the trader may incur during a trade. A reciprocal trade agreement between two governments for a limited period of time and a specified amount is called a bilateral compensation agreement. Exporters from both countries are paid in their local currency, although the value of the deal is usually expressed in a major currency such as the US dollar. With the advent of electronic settlement and the dematerialization of securities, standardized clearing systems as well as standardized securities custodians, custodian banks and registrars were needed. Until that date, many exchanges would act as their own clearing house, but the additional IT systems needed to deal with large trading volumes and the opening of new financial markets in the 1980s, such as the 1986 Big Bang in the UK, led a number of exchanges to separate or include clearing and settlement functions from dedicated organisations. The first payment method that had to be accounted for was the cheque, as the cheques had to be returned to the issuing bank for payment. As a foundation for safe markets, Options Clearing Corporation, also commonly known as OCC, oversees the clearing process in accordance with the rules of the Securities and Exchange Commission and operates under the jurisdiction of the U.S. Securities and Exchange Commission, also known as the SEC. Founded in 1973, OCC is the world`s largest equity derivatives clearing organization. The company acts as both issuer and guarantor of option and futures contracts. Systemically important payment systems (SIPS) are payment systems that have the property that a failure of these systems could threaten the functioning of the entire economy. Generally speaking, these are the main systems for clearing gross or real-time payments in each country, but in the case of Europe, there are some pan-European payment systems.
TARGET2 is a pan-European SIPS that processes important interbank payments. STEP2, managed by the Euro Banking Association, is a large pan-European mass payment clearing system that has the potential to become a SIPS. In the United States, the Federal Reserve System is a SIPS. Compensation agreement. Merriam-Webster.com dictionary, merriam weaver, www.merriam-webster.com/dictionary/clearing%20agreement. Access on 1 Dec. . .