Treasury Management: The Practitioner's Guide

11

Clearing and Settlement Systems

This chapter contains descriptions of a number of clearing and settlement systems that are used for both electronic and check payments within the United States, as well as a multicurrency clearing system. Clearing is all of the steps involved in transferring funds ownership from one party to another except for the final step, which is settlement. Settlement involves the finalization of a payment, so that a new party takes possession of transferred funds. The treasurer should be aware of these processes in order to understand the timing of payment transfers.

CHARACTERISTICS OF CLEARING AND SETTLEMENT SYSTEMS

In clearing and settlement systems, the banks of the payer and beneficiary exchange information regarding monetary transfers; the result of this exchange is payments between the banks.

OVERVIEW OF THE CLEARING AND SETTLEMENT PROCESS

The general concept of clearing and settlement is for the banks of the paying party (the payer) and the receiving party (the beneficiary) to exchange information regarding monetary transfers, resulting in the transfer of funds between the two banks. The banks, in turn, debit the account of the payer and credit the account of the beneficiary. Given the massive volume of such transactions, formal clearing and settlement systems have been installed to streamline the process.

Clearing and settlement systems are generally organized around individual countries or economic regions. Banks located within these areas ...