Bank Clearing ActivityThe Bank's clearing activity is the implementation of activities to determine mutual obligations (collection, reconciliation, correction of information on transactions with securities and preparation of accounting documents for them) and offsetting them on the supply of securities and settlements on them.
To reduce the risks of non-fulfillment of transactions with securities, the bank performs settlements on securities transactions, special funds are formed.
The main task of clearing systems is to reduce the main risks faced by professional participants of securities in the implementation of trading and settlement operations.
The main risks are usually understood:
1) credit risk - the risk of losing the entire amount of money or the entire amount of securities;
2) exchange rate risk associated with the refusal of the counterparty to perform settlements (there is a need to re-conduct transactions with this package of securities under changed conditions);
3) the risk of temporary chains of non-payments and non-payments (liquidity risk);
4) operational risk - the risk of technical failures and personnel errors.
Clearing is based on offsetting counterclaims.
The procedure for offsetting counter-homogeneous claims and determining the obligations of participants in clearing transactions with securities is called netting.
Depending on the number of participants netting can be bilateral and multilateral.
In the case of bilateral netting, it is possible to compensate both monetary obligations and obligations under securities. Accordingly, we can say:
- on netting on securities (made in the case of the purchase and sale of the same lot of securities with the same counterparty);
- netting on funds;
- Netting of securities and funds (partial termination of obligations of the parties).
In an efficient market, several transactions with the same financial instrument are netted on the date of delivery (value) of the instrument.
Determining the obligations of participants in transactions concluded on trading floors, is based on the mechanism of multilateral netting (Figure 6.3).
Fig. 6.3. Multilateral netting scheme
This mechanism provides a reduction in the volume and number of transactions, as well as reduces the costs of participants for operations.
In multilateral netting only secured transactions are included. In the course of multilateral netting, partial fulfillment of obligations takes place by offsetting counterclaims and obligations of participants. In the unaccounted part, the obligations and claims of the participants are defined as net obligations and net claims, according to which the final settlements for the day are carried out.
An example of multilateral netting is shown in Fig. 6.4.
Banks use such common types of clearing systems, in particular:
• clearing systems without asset pre-depositing - are based on settlements with the deposit of assets on the settlement day. These systems assume only credit risk and part of systemic risk;
• clearing systems with pre-depositing of assets - are based on the fact that participants deposit assets in the settlement depository and settlement bank before the trading session, and after it starts trading in the remnants of their balances. In this case, the clearing systems take on all known major risks.
Fig. 6.4. An example of multilateral netting of operations of four participants
There are three types of clearing system calculations:
• settlement systems at the end of the business day. In this system, the clearing organization during the operational day reconciles and accumulates the instructions of the clearing participants, and at the end of the day generates and transfers its own orders to the depository and to the bank where they are executed;
• Systems with discrete calculations. The main difference is that the formation and execution of orders of clearing organizations are made several times a day;
• clearing systems with calculations in real time. Despite the fact that it's safe to say that the lower the value of the settlement period, the lower the market risks and the risks of liquidity loss, not all clearing systems perform real-time calculation.
Systems with real-time calculations have two characteristics. First, in real-time calculations, bilateral and multilateral netting is difficult. Secondly, the high cost of computer systems and software used leads to high transaction costs.
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