The system of clearing transactions assures that the buyer of a security receives delivery of the purchased security in a timely manner. Clearing involves simultaneously confirming that there are sufficient funds to complete the transaction, so the seller receives payment immediately.
An intermediary, known as a clearing corporation or clearing house, facilitates the process between the two parties from the time a commitment is made until the transaction is settled.
Clearing corporations such as the OCC are responsible for validating, delivering, and settling the securities transaction. Major stock exchanges have in-house clearing firms to handle all clearing activities.
Clearing firms reduce credit and counter-party risk for individual traders by ensuring that each party in a transaction can make good on their end of the agreement.
Clearing fees are associated with the transaction process and are typically included in the charges and commissions incurred when trades are executed.
