Trading In Securities: How Clearinghouses And Custody Banking Protects You
7/05/2021 - Wisegeek
Stock market trading is fast and frantic, and it involves enormous sums of money daily. As soon as it opens, people read the financial data, create contracts, and move things around. There are winnings to be gained and losses to be sustained.
This type of trading is complex, and because of the complexity, there are systems in place to protect each party’s interests. Perhaps you are either trading in securities or considering doing so. We will now discuss the role of clearinghouses and custody banking in protecting your funds and assets.
It’s possible for people not to have the assets they claim to have. It’s also possible for people to not have the money to buy them. Many things could go wrong if a robust system was not put in place. This is why investors also speak of liquidity risk and principal risk. Added to that is operational risk, legal risk and settlement bank risk. But now for the good news!
Clearing Houses Act As Intermediaries
If you are looking for information on Clearing Services, Mechanisms and Risk Management, specialist websites can provide more details. The clearing process involves identifying each party involved in a financial transaction. It checks that the first party has something to sell and that the other party has the means to buy it. When the process is complete, the financial obligation is guaranteed.
Without this crucial link in the chain, financial fraud could occur, and money could be lost. Contracts could fall through, and people could breach their commitments.
Clearing Houses Provide A Smooth Transaction
There are two key stages when securities are traded. The first is when a trading agreement is made between both parties. The second is when the settlement occurs. This is when the money is paid, and the securities are transferred. If it is bonds and stocks that are being traded, the matter will conclude three days after the initial trade date. Between these two events, the clearinghouse matches up the two parties’ data using automated technology.
If people own securities, they don’t want them lost or stolen, especially when trading. There are brokers and other financial institutions that are willing to be custody bankers. It’s their role to hold the assets securely until the settlement date. At that time, they will serve to release the funds. Both stocks and bonds can be protected by custody banking, and when it involves international trade, the organisations provide global custody accounts.
No matter how good the system is, however, there will always be an element of risk. There can be stock market crashes and tumbling asset prices. Both national and international economies and political events can have a bearing on a traders’ success. The critical thing is to research well and to invest wisely. However, when a person decides to trade using the stock markets, they will benefit from the added security of all that has been put in place.
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