What are Clearing Firms?

Malcolm Tatum

Also known as clearing houses or corporations, the clearing firm is a business that provides settlement and clearing services on various types of financial transactions. Clearing firms function within the rules and regulations set in place by the government where the firm operates. In some countries, clearing corporations offer a wide range of services, including monitoring the number of private bank notes issued within a specified period of time.

Automated mortgage payments are conducted through clearing firms.
Automated mortgage payments are conducted through clearing firms.

The clearing corporation, or firm, is involved with all types of financial transactions, including investment activity. Bond derivatives and the trading of futures are two examples of the kinds of transactions handled by clearing firms. In addition, the firms provide the mechanism that makes it possible to conduct a wide range of funds transfers between both domestic and international banking firms.

Many people rely on the work of clearing firms in order to receive their weekly or monthly paycheck. In the United States, the Automated Clearing House or ACH provides the structure that allows banks to transfer funds from business accounts to individual accounts. When an employer offers the option of a direct deposit of an employee’s salary or wages into a checking or savings account, that option is exercised through use of the ACH.

Clearing firms also handle financial transactions that make it possible for individual consumers as well as businesses to establish automatic payments to vendors or creditors on a recurring basis. For example, when an individual authorizes a utility company to deduct the monthly bill directly from a checking account, it is a clearing corporation that processes the request and executes the receipt of those requested funds. Automated mortgage payments, donations to charities and other non-profit organizations, and membership dues for local or online clubs are also conducted through clearing firms.

With investment transactions, clearing firms handle the details of every aspect of the transaction. The order to buy is cleared through the firm, as well as the delivery of the investment purchased. While making sure the exchange of pay and deliverables is complete, the clearing firm will also ensure that the transaction is fully complete or settled. All these functions are handled within a matter of seconds, making it possible for sellers to immediately have control of the collected funds while investors immediately have control of their stocks or bonds and may do with them as they please.

Clearing firms also provide an excellent means of documenting each phase of any transaction. It is often possible to use the accumulated data to review each step of the transaction, including the exact date and time each step was initiated and completed. This can be extremely valuable information when there is any type of dispute on the particulars of a given transaction.

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