Clearing is an integral part of the financial system, acting as a critical link between the buyer and the seller. When a trade takes place, the clearing process serves to guarantee the financial security of the two parties involved. It is a legal obligation for the transfer of funds and securities between the two parties. Without a thorough and timely clearing process, chaos and losses would quickly arise.

In a typical clearing sequence, the clearing house is responsible for confirming and settling the trade on behalf of both parties. Once a transaction is validated by the clearinghouse, it ensures that funds are released from the buyer to the seller and securities are transferred to the buyer. This process replaces the need for a lengthy period of exchange and settlement between the transacting parties.

The primary goal of the clearing process is to reduce risk and streamline the settlement process. For instance, parties who fail to complete the transaction may be charged a fee for the unexploited opportunity. This ensures that all parties remain accountable for the transactions they execute.

It is essential for the market to maintain a swift and competent clearing process. It is vital to the maintenance of an orderly and monitored market. For this reason, many security markets and government entities rely on an outside intermediary, such as a clearinghouse to ensure transactions remain safe, secure and confidential.

At any rate, clearinghouse functions are exceptionally important to the securities markets. The clearing process reduces risk to both parties, while keeping the flow of goods and services functioning smoothly. Furthermore, the process provides an element of protection and assurance to those who are investing in the markets. Without a secure and efficient clearing process, trades and investments could not be confidently completed.