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1. Receive and confirm clearing instructions. A clearing instruction tells the netting institution to transfer and/or receive funds between an external account and an account maintained by the institution. Instructions are issued electronically by each counterparty's financial institution. International messaging systems such as SWIFT codify and forward instructions. Every institution has a unique identifier that is referenced in a clearing instruction. Clearing clerks at each institution communicate online and/or verbally to confirm transaction specifics. Discrepancies are immediately investigated and corrected.
2. Net offsetting trades. Unlike RTGS gross transaction activity, netting engines attempt to reduce transaction volume by combining many purchases and sales of the same currency with each counterparty. Only the net amount needs to be transferred at settlement. By cutting down on the amount settled, a financial institution frees up for use elsewhere collateral it would otherwise be obliged to maintain. This reduces expenses and provides more liquidity.
3. Exchange netted settlement instructions with counterparties. After all the institution's transactions have been netted together on a currency basis, it issues a set of final instructions to counterparty institutions. These netted instructions are confirmed between institutions before actual settlement can commence.
4. Review settlements. At settlement, the netted currency amounts are wired to each counterparty institution, which promptly updates all of its internal accounts. Counterparty institutions compares actual transferred funds in each currency denomination against the netted instructions and investigates any discrepancies.