Clearing of derivatives

Settlement and clearing

‘Settlement’ and 'clearing' are two distinct processes. The ‘settlement’ of a transaction requires that each party obtains what was contracted for, usually cash for one party and securities for another, and at the time expected. Clearing is the post-transaction management which ensures that transactions on an exchange will settle.

All transactions involve a level of risk that one party will fail in its obligations to deliver to another.

For exchange-traded derivative contracts there may be multiple instances for delivery of cash or securities between the parties during the life of the transaction. This then requires repeated instances of the clearing and settlement process.

For more information on settlement, see: Settlement of derivatives—overview.

For more information on clearing, see Practice Notes: What is OTC derivative contract clearing? and Triggering and settling credit derivatives.

Indirect clearing is a chain of contractual relationships and payments that enables a party which is not a client of a clearing firm to trade a cleared derivative. While this is common for