Clearing and Settlement: The Plumbing That Keeps Markets Running

Clearing is the set of post-trade processes that take place after a transaction is executed and before it is settled. Once a buyer and a seller agree on a trade, it must be validated, matched, risk-checked, and guaranteed.

This work is performed by a central counterparty (CCP). A CCP becomes the buyer to every seller and the seller to every buyer, significantly reducing counterparty risk. By guaranteeing that each party will fulfill its obligations, the CCP ensures that trades can be completed even if one side defaults. Defaults can occur for various reasons, including insolvency, technical issues, or the seller no longer owning the securities.

Clearing involves several key functions:

• Checking and matching trade details
• Combining trades through netting
• Assessing risks and setting margin requirements
• Guaranteeing the trade

Settlement is the final stage of the trading process – the moment when securities and cash are exchanged and when ownership is officially updated in the central registry.

The central securities depository (CSD) is responsible for maintaining the register of tradable securities represented by book entries. It transfers securities from the seller’s account to the buyer’s account and ensures that the corresponding cash moves in the opposite direction.

Across Europe, settlement currently follows the T+2 standard, which means two business days after the trade date. During settlement:

• Securities move between accounts
• Cash is transferred to complete the trade
• Delivery and payment occur simultaneously (delivery-versus-payment)
  
• Final ownership records are updated

However, a major shift is underway in Europe’s financial markets: From 2027, most securities will settle one day after the trade instead of two – a move from T+2 to T+1.

Clearing and settlement are distinct functions, yet their coordination is essential for ensuring the smooth completion of every trade. Clearing prepares the transaction by validating obligations, assessing risks, and guaranteeing performance. Settlement then finalizes the transfer of securities and cash.

The way these processes reinforce each other creates substantial value for the market:

• Risk mitigation – Clearing establishes certainty before settlement begins, reducing the likelihood of failed deliveries and protecting market integrity.
• Operational efficiency – By separating trade verification from the final exchange of assets, markets can process high volumes quickly and accurately.
• Market confidence – Participants know that once a trade is cleared, it will be settled as agreed, supporting liquidity and orderly markets.
• Systemic stability – Coordinated clearing and settlement help contain disruptions and prevent them from spreading through the financial system.

Clearing establishes the conditions for a secure transfer – settlement completes it. Their integration enables markets to operate efficiently, safely, and reliably.

Clearing and settlement form the backbone of safe and efficient financial markets. They ensure that trades are completed accurately, on time, and with minimal risk. Without these mechanisms, even isolated failures could amplify across the system.

Their importance becomes clear through the additional benefits they provide:

• Ensuring transparent and orderly post-trade processes – Structured verification and reconciliation prevent errors and disputes.
• Supporting high trading volumes – Modern markets require infrastructure capable of handling thousands of daily transactions.

Clearing and settlement are therefore fundamental to the integrity and resilience of financial markets.

Clearing and settlement are evolving rapidly as markets move toward higher speed, stronger automation, and more integrated infrastructures. Several developments will shape the next stage of post-trade services:

• Shorter cycles and new operating models – The move to T+1 is only the first step. Specific asset classes may progress toward T+0, although achieving real-time settlement at scale will require new liquidity frameworks.
• Digital assets and tokenization – Distributed ledger technologies enable programmable delivery-versus-payment and more efficient collateral use. Adoption will depend on regulatory alignment and interoperability.
• Greater cross-market integration – CCPs and CSDs are expected to deepen interoperability to reduce fragmentation and support smoother cross-border activity.
• Next-generation liquidity and cash solutions – Wholesale central bank digital currencies are being explored as tools to streamline settlement and intraday liquidity.
• More advanced risk management – CCPs will refine stress models, margin methodologies, and default management tools as volatility and processing speeds increase.

The direction is clear: Post-trade services are moving toward faster, more automated, and more connected models that support resilient and efficient financial markets.