What is Clearing
Clearing is the procedure by which an organization acts as an intermediary, and assumes the role of a buyer and seller in a transaction, to reconcile orders between transacting parties. Clearing is necessary for the matching of all buy and sell orders in the market. It provides smoother and more efficient markets as parties can make transfers to the clearing corporation rather than to each individual party with whom they transact.
Breaking Down Clearing
Clearing is the process of reconciling purchases and sales of various options, futures, or securities, as well as the direct transfer of funds from one financial institution to another. The process validates the availability of the appropriate funds, records the transfer, and in the case of securities ensures the delivery of the security to the buyer.
In regards to futures and options, a clearing house functions as an intermediary for the transaction, acting as the counterparty to both the buyer and seller of the future or option. This extends to the securities market, where the stock exchange validates the trade of the securities all the way through till settlement.
Clearing houses charge a fee for their services, known as a clearing fee. When an investor pays a commission to the broker, this clearing fee is often already included in that commission amount. This fee supports the centralizing and reconciling of transactions and facilitates the proper delivery of purchased investments.
Automated Clearing House
An automated clearing house (ACH) is an electronic system used for the transfer of funds between entities, often referred to as an electronic funds transfer (EFT). The ACH performs the role of intermediary, processing the sending/receiving of validated funds between institutions.
It is often used for the direct deposit of employee salaries, and can be used to transfer funds between an individual and a business in exchange for goods and services. Traditionally, the sending and receiving bank account information need to be provided, including the account and routing numbers, to facilitate the transaction. This process may also be seen as an electronic check, as it provides the same information as a written check.
Other Uses of Clearing
Clearing can have a variety of meanings depending on the instrument with which it is associated. In the case of check clearing, it is the process involved in transferring the funds promised on the check to the recipient's account. Some banks place holds on funds deposited by check since the transfer is not instantaneous and may require time to process.