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What is a Clearing Corporation?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 24 September 2014
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    Conjecture Corporation
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Clearing corporations are entities that are connected with exchanges and assist in the processing of investment transactions. Sometimes referred to as clearing houses or firms, the clearing corporation functions to ensure that any executed trade is conducted smoothly as well as in a timely manner. For investors, a clearinghouse functions as the seller, while also fulfilling the role of buyer when dealing with entities that wish to sell securities.

A clearing corporation can be concerned with every aspect of a transaction. Often, the corporation will represent the exchange to the investor, making sure that full disclosure about the nature of a security is made. Through the auspices of a clearing broker, the clearing corporation can help to provide details about the background and past performance of the security, as well as prepare projections based on current and anticipated conditions in the market.

Once full disclosure is established, the clearing corporation aids in the settlement of the transaction. This will involve making sure that the terms and conditions of the sale are understood and agreed upon by both parties. As the buyer executes the order to purchase a given security, the clearing corporation follows through to make sure payment is tendered and the seller credits the sale and initiates the transfer of ownership.

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The final duty of the clearing corporation has to do with the delivery of the security to the new owner. This will involve making sure that all documents relating to the sale and transfer are complete and in order. Both the buyer and the seller will receive documents confirming the sale and naming the investor as the new owner of record for the security.

Serving as the line of communication between a buyer and a seller, the clearing corporation works to make sure that executed trades are carried out with precision. In addition, the clearing corporation will ensure that the terms and conditions outlined in the sale are within the regulations that govern the market.

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