| Clearing (finance) |
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In its wider sense clearing involves the management of post-trading, pre-settlement credit exposures, to ensure that trades are settled in accordance with market rules, even if a buyer or seller becomes insolvent prior to settlement. CENTRAL COUNTERPARTY Clearing generally involves the use of a well capitalised Financial Institution known as a Central Counterparty (CCP). The CCP becomes a party to every trade, acting as buyer to market participant sellers, and seller to market participant buyers. In respect of unsettled trades, market participants therefore bear the standardised Credit Risk of the CCP, and not that of each other in a decentralised market. In the United States , interbank clearing is done through the Automated Clearing House (ACH). Its rules and regulations are set by the National Automated Clearing House Association and the Federal Reserve . The ACH network acts as central clearing facility for all Electronic Fund Transfer (EFT) transactions. NETTING The CCP can net its daily purchases and sales in like securities since each market participant has only one counterparty to its trades. Such netting is widely identified as the key benefit offered by the use of a CCP. SEE ALSO
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