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Fixed Income Clearing and Settlement editorial staff editorial staff

Here's a guide to understanding fixed income clearing and settlement systems and services.

  • Clearing and settle system services are designed to maintain order and reduce risk within a variety of transactions, such as traditional stocks and bonds.
  • There are many things to consider before using a clearing and settle system service, such as understanding the market in which it is operating.
  • Having prior knowledge about margin and collateral and the reliability of interface file are essential factors when choosing a clearing and settle system service.

Settling and clearing fixed income securities involves matching a buyer with a seller for mutually agreed upon pricing and terms. A fixed income security delivers a fixed rate of return at predetermined intervals. If you loan money as a business with regular payment intervals, this is a fixed income security. You probably know these securities as government and private bonds and corporate bank debt. Sometimes preferred stock can be a fixed income security.

Fixed income trade settlement and clearing takes this debt and provides a trading mechanism on the open market. This makes the process efficient, less risky and usually more profitable than it would be otherwise. This market for fixed income securities has also gone beyond the traditional bonds and stocks. It now includes mortgage-backed securities and collateralized debt obligations, or CDOs.

Banks, mortgage companies and insurance companies issue these for varied reasons such as capital relief and risk management. The clearing and settlement process maintains order within these varied transactions. Before your business makes use of these entities, there are a few items to consider, including understanding the fixed income clearance and settlement market, become a member of a fixed income financial association and seek the counsel of a fixed income clearance and settlement specialist.

Things to consider before using clearing and settle systems and services

  1. Understand the fixed income clearance and settlement market.

  2. Become a member of a fixed income financial association.

  3. Seek the counsel of a fixed income clearance and settlement specialist.

Examine the process of fixed income clearing systems in order to help you understand the process. Before you use a service or product, it is prudent to understand the market in which it operates. The clearing and settlement procedures are just a small part of the larger market in which these securities trade.

Join a cleared fixed income financial association. A membership in a fixed income association can open your business to other opportunities within the industry. At the very least, you can receive feedback from other members on the best clearing services.

Employ the services of a clearing and settlement process company. If your company chooses to outsource the settlement of fixed income securities, you need to research the primary companies that participate in the fixed income market. Choosing a firm with an unknown history can lead to a loss in market value or an unhappy customer. Other things to consider include:

  • Reliability and availability of interface files. The clearing and settling service must process all electronic information, including fees, profits and loss, trades, collaterals, margins and bank balances. The information should be delivered in a timely, file format and explicitly detail the specifications and/or functions that they are able to provide.

  • Accuracy of instrument and multimarket settlement. It's essential for the clearing and settling service to cover different types of business models and to have the ability to adapt to whatever is needed in the future. It's critical that the clearing and settle service be able to accurately settle all types of products, including currency transactions, financial derivatives and spot securities that may need to be executed by an organized exchange or over the counter.

  • Margin and collateral requirements. This area presents a risk of loss risks, so if the margin increases or there is a decline in the value of the corresponding collateral, the broker will suffer a loss that may lead to potentially deficit accounts. The clearing and settle system service reduces the settlement risks by dividing transactions multilateral netting and monitors the risk within the client portfolio.

Many, if not all, clearing and settle system services are available 24 hours a day. The reason a clearing and settlement firm should be available at all times is so that brokers can open a case online and receive quick support by way of email, phone or chat, which helps to avoid the waste of time and money. It's important to ensure you choose a firm that guarantees transaction fees and relevant rebates are handled efficiently. The firm should also be able to provide competitive prices for trade settlements. Two popular clearing and settle system services include:

  • Commodity Position Management System (CPMS) is a windows based back-office system that is used for international trading firms that trade physical commodities. The system allows for measurement, identification, risk and performance, and management of trading positions across the market. The system monitors unpriced contracts, which are marked to market and will continue monitoring to ensure the contract is liquidated before priced.

  • Allegro's enterprise CTRM software is considered the next generation of clearing and settle systems. The advanced analytics and CTRM software empowers companies that market, extract, trade, process and/or consume commodities allowing them to make informed decisions and have complete control over the growth of their business. Allegro offers consumers data-driven decision support which allows for risk management, regulatory compliance, management of position visibility and controls, all on one platform.

Before you employ the services of a fixed income clearing and settlement service, it is good idea to ask for a list of client references to whom you can ask about the fixed income settlements company.

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