Meaning and process
Clearing is the process of determining participants’ obligations after trades are concluded and preparing their execution. It may include reconciliation, position calculation, netting provided for by the rules and collateral management. The precise organization depends on the market: the involvement of a central counterparty and the set of protection mechanisms must be established separately.
If a participant both bought and sold identical instruments during a trading session, clearing rules may determine net obligations instead of separate offsetting deliveries for every transaction. This simplifies execution, but does not remove collateral requirements or the risk of an adverse market move.
Clearing is not settlement
Clearing is not the same as a completed transfer of money and securities. Settlement is the next or a related stage in performing the obligations. Nor does the existence of clearing guarantee that losses will be absent if a participant defaults. To understand a transaction, identify who is responsible for the obligations, how collateral is valued and what happens when funds are insufficient or deadlines are missed. Related reading: [exchange and settlement](/guides/exchange-and-settlement/), [transaction settlement](/glossary/raschety-po-sdelke/) and [counterparty risk](/glossary/risk-kontragenta).