the most important facts you must to know about Depositories and Clearing Facilities

If a customer buys 500 shares of SBUX, his broker-dealer finds a market maker who wants to sell 500 shares right now at their offer price. Such trades settle "T + 2" or two business days from the trade date. But, what does that part—the next two business days involve, if the trade is already completed?

When he buys those 500 shares of SBUX, let's say at $30 a share, his account will show the 500 shares among his positions and will debit the $15,000 plus a commission for the purchase. But, those are just numbers on a screen at this point. Until the transaction is cleared and settled, nothing is completed. The firms that clear transactions in securities are known as clearing agencies or clearing facilities.

Clearing Agencies are self-regulatory organizations that are required to register with the Commission. There are two types of clearing agencies -- clearing corporations and depositories.

Clearing corporations include: The National Securities Clearing Corporation, the Fixed Income Clearing Corporation, and the Options Clearing Corporation (OCC).

The only depository is the Depository Trust Company or DTC.

Clearing corporations compare member transactions (or report to members the results of exchange comparison operations), clear those trades and prepare instructions for automated settlement of those trades, and often act as intermediaries in making those settlements.

Depositories hold securities certificates in bulk form for their participants and maintain ownership records of the securities on their own books. Physical securities are maintained in vaults, and ownership records are maintained on the books of the depository.

Clearing corporations generally instruct depositories to make securities deliveries that result from settlement of securities transactions. In addition, depositories receive instructions from participants to move securities from one participant's account to another participant's account, either for free or in exchange for a payment of money."


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