Central Counterparty Clearing

History

In the United States, there is a separation between the Clearing Broker and the Depository. This means that there will be multiple clearing brokers that have to reconcile shares and money against other clearing brokers. It also means that the clearing brokers bear the risk of default on the leg of the transaction that they are servicing. Contrast this with the options market with its Options Clearing Corporation, which is a true central clearing counterparty and which bears all default risk (by distributing it evenly among its members).

To better understand Central Counterparty Clearing (CCC), a relatively new process, in the U.S. equity markets, first consider the lifecycle of a trade before Central Counterparty Clearing:

1. Orders are routed from the investment firms (one is a buyer, the other is a seller) to their respective Executing Brokers.
2. The Executing Brokers send the orders to the appropriate Marketplace for the security being traded. The Marketplaces respond with executions ("fills").
3. The Executing Brokers send the fills to the Clearing Broker that was designated by the investment firms. Many Executing Brokers are themselves Clearing Brokers, a term which is called "self-clearing".
4. The Marketplace(s) and the Clearing Brokers compare their shares/money to make sure that they match. This is referred to as "Street-Side matching".
5. The Investment Managers inform their respective Custodians what they should expect to receive from/deliver to the Clearing Brokers, and the Custodians perform this comparison. This is referred to as "Customer-Side matching". This occurs the day of the trade (T+0).

On Settlement Date (which is usually up to 3 days after Trade Date, the date when the actual trade occurred), the Clearing Brokers will deliver/receive the match amount of shares/money to settle the trade with both Investment firms.