Clearing is The concept, types and functions of clearing

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

In financial and banking activities, there are a lot of terms, the essence of which is difficult to understand by name. One of them is clearing. In simple words, the exchange procedure. Companies, banks, countries can exchange goods, services, securities. A clearing company is an intermediary that brings sellers and buyers together.

The essence of the term

Clearing is a system of monetary settlements based on the offset by the parties of claims and obligations. Participants in the transaction can be legal entities and individuals. Interbank clearing operates within countries. Bidders write out checks, banks use these documents to debit and credit funds. The need for set-off led to the creation of clearing/clearing houses. All checks arrive at the chambers, where they are sorted by banks, the offset of claims is carried out several times a day by the market regulator. Clearing contributes to the acceleration and simplification of the circulation process, its reduction in price.

For example, one organization transfers nuts to another for $200 per ton. In turn, the second organization gives cars for $ 2,000. To maintain the balance, the first company must sell 200 tons of nuts and receive 20 cars. With such an exchange, there will be no need for cash payments. This is the essence of the concept of "clearing".

Compliance with the terms of the transaction is monitored by authorized companies, whose duties include:

• Drafting contracts.
• Balancing the cost.
• Determination of the number of goods.
• Ensuring the security of transactions.

In order to equalize the difference in costs between partners, cash payments are made. Cleaning companies must obtain a license to carry out such work. The activities of such organizations are regulated by the Federal Law “On Clearing and Clearing Activities”.

A bit of history

Initially, clearing was used on the stock exchange. The process consisted of making settlements for securities and transferring ownership without moving documents between owners. Today, clearing is the process of changing the amount on a trader's account based on the result of trading, that is, the process of determining the financial result of a transaction. Clearing increases sales volumes and reduces risks. Companies that provide these services are dealers between traders and their customers. The balance between cash claims and customer liabilities is called netting. Positive netting indicates that there are no debts to other participants.

Types of clearing

By payment method:

• simple (transfer after auction);
• multilateral (operations are carried out on a group of transactions);
• centralized (offsets are handled by a special organization).

In order of crediting funds:

• with full collateral - the operation is carried out based on the available funds in the account;
• with partial collateral - the volume of transactions is calculated based on a certain limit;
• without collateral - the transaction is carried out without replenishment of the letter of credit.

By frequency:

• as needed;
• permanent.

By the number of parties involved:

• interbank clearing (settlements can be made both between branches of the same bank and between different institutions);
• currency - these are international settlements under contracts;
• commodity - mutual settlement between the stock exchange and the securities market.

During the crisis, clearing was used as an auxiliary means of settlement between companies. This made it possible to reduce the amount of money issued by the state and restore the balance of payments.

Clearing functions:

1. Collecting data on all completed auctions.
2. Review of concluded contracts.
3. Distribution of responsibilities.
4. Transfer of shares.
5. Implementation of settlements based on the results of trading.
6. Provision of guarantees.

Exchange clearing is…

At the Moscow Interbank Currency Exchange (MICEX), the financial results are calculated byJSCB "National Clearing Centre". This organization is engaged in debiting and crediting funds to the accounts of bidders.

There are three sessions on the MICEX: daytime, intermediate and evening. The main transactions are carried out during the intermediate session - from 17:00 to 18:00, and funds transfers - during the day (14:00-14:03) and evening (18:45-19:00).

Clearing starts from the moment the deal is made. The center checks the terms of the contract for compliance with the submitted documents. If there are inconsistencies, these conditions are corrected. Upon completion of the verification, the transaction is registered. Based on the volume of the trading operation, the remuneration of the clearing organization is determined. All information on trading goes to the chamber, where securities are exchanged for currency and credited to the account of the winner of the auction. That is, in simple terms, clearing is an activity to establish agreements between sellers and buyers of the securities on the exchange.

Domestic operations

Non-cash operations for debiting and crediting funds are carried out at the request of legal entities through single settlement centers. This process is called interbank clearing. The whole system is based on the fact that banks carry out the same operations, have similar accounting records and a high level of computerization.

The advantage of clearing is that funds are not distributed to correspondent accounts, but are accumulated in centers. By decision of the Central Bank of the Russian Federation, non-banking institutions can conduct settlements on the basis of a license issued by the regulator. The center needs to get 2licenses: for banking operations and technical, confirming readiness to join the electronic settlement system.

The center can be a chamber established by a commercial bank, the Central Bank, other legal entities and individuals. The objects of clearing can be various documents: payments, bills, transfers, checks, securities, letters of credit, loans, credits, etc.

Deal Settlement

The following forms of clearing are distinguished by scope:

• local - mutual settlements between institutions in the same region, branches;
• nationwide - offsetting customer claims within the same country.

Participants in the process - banks - are settled on their obligations in the amount of net positions calculated by the chamber based on the results of netting. This is a process that matches the amount of the client's monetary claims with his obligations.

Netting is a part of clearing, a process in which the client's monetary claims are set off against his monetary obligations. Based on the results of netting, a net balance is determined for each client - a position.

Clearing centers

Clearing is a professional activity for determining obligations under transactions with the Central Bank. This process includes collection, reconciliation, adjustment of transaction data and paperwork. This activity is carried out by an organization licensed by the Central Bank of the Russian Federation. Such a center operates on the basis of an agreement with the organizer of the auction. Participants in the process are securities market participants who have entered intoservice center contract. According to the results of trading, money transfers are carried out by the settlement organization on the basis of a license from the Central Bank. Transaction obligations are determined by brokers, dealers and other professional market participants. The center itself determines the transactions for which clearing will be carried out.

The clearing organization provides the following services:

• reconciliation of the terms of transactions between participants;
• implementation of the offset of claims on all completed transactions - netting;
• establishing a procedure for offsetting claims and obligations of a RCB participant;
• disposal of reserve funds of clearing centers created by participants in order to guarantee the fulfillment of obligations under transactions.

An important place in the activities of such organizations is given to the risk management system for outstanding transactions. It includes:

• deposit of securities and funds on the accounts of system participants;
• recalculating net liabilities by excluding unsecured transactions;
• guarantees, guarantees.

Settlement of transactions based on the results of centralized clearing is carried out by settlement organizations.

Advantages and disadvantages

Implementation of clearing by centers makes it possible:

• Increase the speed of funds rotation.
• Increase the reliability of settlements.
• Reduce transaction costs.
• Simplify the transaction process.
• Reduce the amount of mutual debts.

At the same time, there is an increase in risks for participants in transactions:

• Market fluctuations.
• Breach of the terms of the contract.
• Increased liabilities due to disruption of electronic systems.
• Bankruptcy.

In order to reduce these risks, clearing houses form special funds.

Guarantees

Funds are formed at the expense of participants in transactions. As an asset, both securities and funds can be used. Contributions are used to secure obligations in case of insufficient funds in the accounts of the parties to the agreement. The rules for creating funds provide for the amount of contributions, directions and scheme for the use of funds. In one center, several funds can be created for different purposes. Clients' money is placed on the company's accounts. All parties to the agreement are notified of any transfer of funds.

NKC

The National Clearing Center performs the duties of a clearing company in all markets: stock, commodity, precious metals, derivatives. The center acts as an intermediary and assumes the risks of transactions. Potential participants in the system must fulfill a number of requirements:

1. Conclude a contract for the provision of services.
2. Open an account in rubles or other foreign currency.
3. Pay for services at the rates established by the contract.
4. At the request of the center, present documents confirming the source of funds.

The Center, at its discretion, has the right to restrict a number of operations.

International clearing

International clearing is used in settlements between foreign trade participants under interstate agreements. After offsetting claims by banks, a balance is formed. The conditions for its formation, methods and terms of repayment are prescribed in advance in the agreement. The debt limit depends on the turnover and is fixed at 5-10% of its volume.

Clearing credit is usually provided by countries with an active balance of payments in international settlements. In this case, the debt can be repaid not only in money, but also in goods. Then we will talk about countertrade. In terms of the volume of transactions, clearing can cover 95% of the turnover or be carried out on separate transactions.