Legal Definitions - central clearing system

A central clearing system is a method used to facilitate securities transactions. In this system, an agent or subsidiary of an exchange acts as a clearinghouse for member brokerage firms. The clearinghouse clears the checks, settles the accounts, and delivers the payments on behalf of the member firms.

For example, let's say that a brokerage firm buys 100 shares of a company's stock from another brokerage firm. The central clearing system would ensure that the transaction is completed smoothly by clearing the checks, settling the accounts, and delivering the payment to the seller.

Most transactions in the central clearing system are reflected solely by computerized book entries. The clearinghouse provides statements that show the net balance to be paid to reconcile the member firm's accounts.

The central clearing system is an important part of the securities industry because it helps to ensure that transactions are completed efficiently and accurately. It also helps to reduce the risk of default by member firms, which can have a significant impact on the financial markets.