Clearing Broker Dealers

Clearing Broker Dealers: members of a clearing corportation are considered clearing bloker dealers. Clearing companies are the ones that are used to settle financial trades.

They have an important role in the financial industry, because they are considered the third party that guarantees the exchange of securities between customers of the clearing house.

For example, suppose that a trading desk wants to enter into a financial deal. The goal is to buy five million shares of a company stock, lets say Jonson and Jonson (which was a recent target of Warren Buffet).

The buyer of the shares need to find a counterpart in order to perform the transaction. In this case, it is usually a sell-side player that will fullfil the request of five million shares from the market.

In order to consumate the trade, the buyer needs to settle iwth the seller. This can be done in several ways (including electronically), but there is usually a third party, a clearing house, that guarantees the transaction.

Basically, the seller sends the securities (shares) to a clearing corporation. The buyer sends to funds corresponding to the transaction to an account controlled by the clearing house.

Finally, the clearing house, upon receipt of the transferes, will disband the cash and the securities to the requesting parties.

To act as a clearing house, the broker-dealer must be licensed by the SEC.

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