Analytical Finance: Volume I: The Mathematics of Equity Derivatives, Markets, Risk and Valuation
Trading Financial Instruments Financial instruments can be traded on an exchange or over the counter (OTC). Exchange trades securities are standardized instruments. A clearinghouse in connection to a marketplace clears most securities.
In such a way the clearinghouse is counterparty to both the seller and the buyer. 1.1 Clearing and Settlement Clearing is the process of settling a trade including the deposit of any necessary collateral with the clearing organization and exchange of any necessary cash and paperwork. The term clearing usually implies that the clearing organization becomes a party in contracts, rather than merely putting other parties in contact with each other.
For example, A wishes to sell to B. In practice, A sells to C, the clearinghouse, and B buys from C. Settlement is used to refer to the completion of any required payment between two parties to fulfil an obligation. Settlement also refers to the process by which a trade is entered onto the books and records of all the parties to the transaction including brokers or dealers, a clearinghouse, and any other financial institution with a stake in the trade.
How settlement and clearing take place depends on what kinds of instrument are traded and the type of trade process, for example at an exchange or
over the counter.
