Clearing and SettlementEquity
Clearing and settlement ensures that brokers and exchanges execute trades according to terms until completion. The process is generally required by a government agency who regulates securities trading. The clearing and settlement process works throughout the procedure of a share trading transaction. A financial transaction for shares and equities occur in a certain order.
A trader issues a transaction order to their broker. If the conditions of the order are met, the trade is executed, which requires reporting the trade to a share exchange. The share exchange reviews its reports from both the buyer and seller to ensure that all prices and share numbers for this transaction agree. If accurate, the settlement arm of the exchange transfers both the share and the money, and marks the exchange as complete. Not every exchange has an internal transaction clearing and settlement house. Many will contract third parties for processing, potentially saving costs.
Longer durations for clearing and settlement processes result in a higher transaction failure rate, since situations can change between trade execution and settlement. Changes will rapidly modify a trade’s variables. This can also ruin the ability for shareholders to resell, or close out, their investments. This results in the collapse of their trading strategies. The result is lessened desire to trade under long clearing and settlement rules. To prevent these problems, nations usually have legal time restrictions for clearing and settlement. The trade must occur within the trade day and additional days which change depending on the security. The trade day is the actual day for check cashing. The additional days allowed for clearing and settlement depends on the government regulating the exchange. The usual American rule is trading day plus 3 additional days for equities, trade day plus 3 days for bonds, trade day plus 1 day for government issued securities, and trading day only for mutual funds.
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