Investment - Clearing and Settlements 
Overview
In order to assist traders in clearing and settling full orders, brokers and trading venues—particularly those that facilitate deals between strangers—typically require middlemen. While settlement refers to the exchange of cash or another valuable item between the buyer and seller, trade execution involves the seller and buyer coming to an agreement on a price for the security. 

Clearing 
The day's tades are often combined at a clearing house, where securities and net payments are also exchanged. Confirmation is the clearing house's most significant task. The buyer and seller must verify that they exchanged and the details of their trade before the trade may be concluded. Only manually negotiated trades require confirmation, which usually occurs the day of the trade. Confirmation for trades made electronically happens automatically. 

Clearing houses need their members to post margins and maintain sufficient capital in order to guarantee that their trades are settled. Cash or securities offered as collateral are known as margins. Additionally, clearinghouses put a cap on the total net quantities that their members can settle. Stated differently, there is a maximum amount that can never be exceeded by the outcome of their sold positions being deducted from their purchases that day. To make sure they don't set up trades they can't pay, members are watched.

In general, this mechanism makes sure that dealers complete their trades. Dealers and brokers ensure that the trades they set up for their institutional and individual clients are settled. Members of clearing houses ensure that the transactions provided to them by their clearing customers are settled, while clearing houses ensure that all trades submitted to them by their clearing members are settled. The clearing house uses its own capital or money pledged by other clearing house members to settle trades in the event that a clearing member is unable to do so. 

Reliability in trade settlement is crucial because it enables strangers to enter into contracts with one another without fear of counterparty risk. As a result, a secure clearing system significantly boosts liquidity by increasing the number of counterparties that a trader may safely arrange a trade with.

Settlement 
After confirmation, settlement could happen instantly or it could take up to two trading days. The timing of the processes used to exchange money and securities and settle trades is referred to as the settlement cycle. Each market has a different cycle length. Stocks and bonds settle two trading days following the trade in the majority of nations. 

Both the buyer and the seller are required to present cash and the security to the clearing house. The transaction is subsequently made by the settlement agency through a procedure known as delivery versus payment. The losses that arise from one side settling and the other does not are eliminated by this procedure. 

In an effort to lower settlement risk—a type of counterparty risk in which one of the parties breaches their commitment between the time a trade is arranged and the time it is settled—many markets have shortened their settlement cycles. For example, it's possible that at that moment someone declared bankruptcy. The less harm that results from a trader's failure to settle, the fewer outstanding trades there are. Furthermore, there is less room for significant price fluctuations prior to the final settlement the shorter the settlement time. 

When a trade is finalized, the settlement agent notifies the transfer agent of the issuing firm, who keeps track of who owns the company's securities. Though occasionally businesses maintain their own records and serve as their own transfer agents, banks and trust organizations make up the majority of transfer agents. In order to know who can vote in corporate elections, who is eligible to receive interest and dividend payments, and to whom different corporate communications should be directed, companies must keep databases regarding their security holders. The duties of the transfer agent and clearing house are shown in the graphic below.

Custodians look after investments, precious metals, and securities in a secure manner. While protecting stock certificates is no longer necessary for the majority of securities transactions, custodians may still provide other services including transaction settlement.