Clearing

• Clearing is the process of updating records. When a transaction is settled, it is cleared or marked as settled in the database, and the individual or institution is officially released from obligations. If, for instance, the United States Treasury Department pays a bond holder the value of the investment, the transaction is not finalized until a representative from the Treasury Department updates the account as being paid or settled. The clearing of transactions usually occurs after payments have been completely processed by the financial institution.
  
  

Settlement

• Settlement is the actual exchange of money or goods. A settlement begins when the two parties meet and discuss possible resolutions to the agreement or debt owed. After coming to a mutual consensus, the debtor complies with what is agreed to complete the settlement. There are two types of settlements: gross and net. While gross settlements are made according to the actual value of the good or service, net settlements are paid according to the difference in market value compared with the amount owed. Individuals making a net settlement essentially pay the difference between the initial amount owed, excluding interest and the total due.
  
  

The Need for Both

• A clearing and settlement system is vital to any financial institution. A transaction cannot be considered complete without updating accounts and cannot be initiated without discussion. A poorly designed clearing and settlement system negatively affects a company's financial department by causing a ripple effect throughout the corporation. Every department feels the effects of a finance department that cannot properly manage accounts or exchange funds.
  
  

An Example: Securities

• Securities are debt instruments primarily issued by the United States Treasury Department. Such instruments are excellent investments because they can easily be exchanged for cash. Clearing and settlement for securities can be a rapid process of exchange and update if the transaction is conducted electronically. Electronic securities settlements for cash are usually processed on the same business day while other settlements are processed the following business day.