Settlement Definition. Settlement of securities, commodities or currencies is the process whereby the asset in question or interest in the asset is delivered or sold, usually accompanied by the delivery of goods funds as payment, to fulfill contractual obligations unless performed by a trade of assets of similar value. The completion of a financial transaction generally requires two steps, and when completed, the transaction is said to be “cleared and settled”. Clearing is an integral part of the overall settlement process that creates the funds that are freely available for further trading. After a trade has been matched by a trading system, it needs to be cleared and settled so that the seller gets paid and the buyer gets ownership of the security or currency traded. Clearing is comprised of all steps of the post-trade processes apart from the final payment and change in ownership. Clearing is closely associated with the control of counter-party risk. Clearing houses may act as central counter-parties, for example. Many of these operations are now computerized. International claims are settled by clearing unions, groups of central banks, and other major financial institutions. Settlement completes the process by transferring good funds and ownership.
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