What is the role of the clearing house in the settlement process?
This question was discussed at a recent tutorial and required some further research. My understanding is as follows:
When dealing in a derivatives exchange the process is quite simple. For example, in Euronext.LIFFE, all deals would be put through the LIFFE.CONNECT system and the clearing house LCH.Clearnet would act as central counterparty to all trades.
When dealing in the equity market the system is less straight-forward. The available systems are:
SETS for order-driven trades
SEAQ or SEAT PLUS for quote-driven trades in the listed market or in the AIM market respectively
Some trades can be placed using SETSmm, which is a mixture between SETS and a quote-driven system. Basically there are a number of market makers that guarantee to always have an order to buy and to sell in the SETS system, which gives it a mixture between order and quote driven (the best of both worlds).
When settling deals, the parties have the option to settle direct with one another through CREST. Such settlement may involve a small amount of counterparty risk. A second option is to settle through LCH.Clearnet. Both sides of the equity trade will deal with LCH.Clearnet, who will guarantee both sides of the trade, eliminating the counterparty settlement risk.
If you have any further insight into this please add to the thread. There is some useful information on:
http://www.lch.com/services/equityclear/overview.asp
This question was discussed at a recent tutorial and required some further research. My understanding is as follows:
When dealing in a derivatives exchange the process is quite simple. For example, in Euronext.LIFFE, all deals would be put through the LIFFE.CONNECT system and the clearing house LCH.Clearnet would act as central counterparty to all trades.
When dealing in the equity market the system is less straight-forward. The available systems are:
SETS for order-driven trades
SEAQ or SEAT PLUS for quote-driven trades in the listed market or in the AIM market respectively
Some trades can be placed using SETSmm, which is a mixture between SETS and a quote-driven system. Basically there are a number of market makers that guarantee to always have an order to buy and to sell in the SETS system, which gives it a mixture between order and quote driven (the best of both worlds).
When settling deals, the parties have the option to settle direct with one another through CREST. Such settlement may involve a small amount of counterparty risk. A second option is to settle through LCH.Clearnet. Both sides of the equity trade will deal with LCH.Clearnet, who will guarantee both sides of the trade, eliminating the counterparty settlement risk.
If you have any further insight into this please add to the thread. There is some useful information on:
http://www.lch.com/services/equityclear/overview.asp