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Clearing definition
Clearing is the process that runs between the moment a trade is executed and the moment it settles. It checks the trade details, matches the buyer to the seller, works out who owes what, and readies the transaction for completion.
During clearing, a clearing house or central counterparty can step between the two sides to cut counterparty risk. This confirms that each party can deliver the cash, securities, or other instruments it owes.
Clearing is the activity; a clearing house is the institution that performs it. Clearing keeps records accurate and settlement safe, and without it errors, failed trades, and defaults would carry more risk through the market. The actual exchange of cash and assets happens at the next stage, settlement.
Clearing Example
You buy 100 shares of a stock at USD 50 each. After execution, clearing confirms the trade and works out the obligations.
100 √ó USD 50 = USD 5,000
You must pay USD 5,000, and the seller must deliver 100 shares. Once clearing is complete, the trade moves to settlement, where the cash and shares actually change hands.
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