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1. Use automated systems that permit electronic processing of data, payments, and deliveries of securities. Technology is essential to efficient settlement clearance systems which eliminate a possible backlog of transactions and the risk of physical delivery of stock certificates. Take backup precautions to ensure the systems are safe from unauthorized people and from the loss of information. (See Reference 1.)
2. Confirm to the clients after an agreement is reached to engage in a certain transaction. Both buying and selling institutions usually record these transactions and after the execution a confirmation document is sent to the client as an affirmation of the transaction. (See Reference 4.)
3. Trade-match the records of the buyers to that of the sellers. Trade matching involves the collection of the transactional data and recording to ensure that the specific terms of buyers' and sellers' trade records match correctly. Central counterparties (CPPs) or clear-houses associated with the buyers' and sellers' respective financial institutions are charged with facilitating the credit match to reduce risk. (See Reference 2.)
4. Net settlement obligations to reduce the large number of transactions that need to be cleared and settled. Netting involves each party aggregating the amounts of a currency to be delivered by it. On the payment date, only the difference in the aggregate amounts will be delivered by the party with the larger aggregate obligation. (See Reference 3.)
5. Settle the trade upon receiving settlement instructions from the central counterparties' clear-house. Settling occurs when the buyers and sellers both receive payment for their trade insecurities or derivatives. Issue a certificate of ownership to mark the transfer of stock ownership from the selling institution to the buying institution. The issuing of this certificate signals the end of the clearing of the settlement system. (See Reference 4.)