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Simple English definitions for legal terms
central clearing system
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A quick definition of central clearing system:
Central Clearing System: A way to make buying and selling stocks easier. It works like this: instead of each person or company having to keep track of all their own transactions, a special group called a clearinghouse does it for them. The clearinghouse makes sure everyone gets paid the right amount and keeps track of everything on a computer. This makes it faster and safer to trade stocks.
A more thorough explanation:
A central clearing system is a method used to facilitate securities transactions. In this system, an agent or subsidiary of an exchange acts as a clearinghouse for member brokerage firms. The clearinghouse clears the checks, settles the accounts, and delivers the payments on behalf of the member firms.
For example, let's say that a brokerage firm buys 100 shares of a company's stock from another brokerage firm. The central clearing system would ensure that the transaction is completed smoothly by clearing the checks, settling the accounts, and delivering the payment to the seller.
Most transactions in the central clearing system are reflected solely by computerized book entries. The clearinghouse provides statements that show the net balance to be paid to reconcile the member firm's accounts.
The central clearing system is an important part of the securities industry because it helps to ensure that transactions are completed efficiently and accurately. It also helps to reduce the risk of default by member firms, which can have a significant impact on the financial markets.