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.

Clearing Houses

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.

RELATED TERMS
  1. Clearing House

    Clearing houses are responsible for clearing and settling trades, ...
  2. Clearing Corporation

    A clearing corporation is an organization associated with an ...
  3. International Clearing System

    The International Clearing System is a trade clearing system ...
  4. Clearing Broker

    A clearing broker is a member of an exchange that acts as a liaison ...
  5. Book Transfer

    A book transfer is the transfer of funds from one deposit account ...
  6. Transfer

    A change in ownership of an asset, or a movement of funds and/or ...
Related Articles
  1. Personal Finance

    8 Low-Cost Ways To Transfer Money

    If cost is your primary concern, there are several cheap(er) ways to move funds.
  2. Personal Finance

    How to Transfer Credit Card Balances to a New Card

    Before you read that new credit card's zero percent interest balance transfer offer, see our guide to help save money and pay down your existing debt.
  3. Insights

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  4. Trading

    What Does a Clearing House Do?

    A clearing house is a third-party agency or separate entity that acts as a go-between for buyers and sellers in financial markets.
  5. Personal Finance

    The Ins and Outs of Bank Fees

    These service charges could nickel-and-dime you right out of your nest egg.
  6. Insights

    Why Are Safe Haven Assets Disappearing?

    The push for safer trading is sharply reducing the supply of safe haven assets, experts say.
  7. Small Business

    Moneygram Vs. PayPal Vs. Xoom: Who has the Lowest Fees?

    Learn about the different fees associated with leading transfer services PayPal, MoneyGram and Xoom and the types of services that each company provides.
  8. Personal Finance

    Sending Money? The Top Money Transfer Services

    Need to send money in a hurry? Here's a list of the major players in the money transfer business. Compare rates, times and other details before deciding.
RELATED FAQS
  1. Correspondent banks versus intermediary banks

    Correspondent and intermediary banks both act as facilitating third parties during certain transactions, but you should know ... Read Answer >>
Trading Center