Clearing and Settlement in Financial Markets: Importance and Process

Clearing and settlement are fundamental processes in financial markets. After the trade is executed, the record is submitted to the clearing agency, which matches the buyer and seller record and confirms that the counterparts agree to the terms. The agency reports discrepancies to traders in case the reports do not match, who then try and resolve them. After the clearing process is performed, through settlement, agencies fulfil the delivery requirements of the securities object of a trade. The settlement agency receives cash from buyers and securities from sellers and, at the end of the process, gives the securities to the buyer and the cash to the seller. Agencies perform an important function in case a trader is not trustworthy or creditworthy.

The Spanish financial system reform started in the seventies and had to necessarily reach the stage of having securities markets, especially the stock exchanges. This implied, as a critical prerequisite, the reform of legal rules, but this was not enough: the modernization of the major stock markets around the world such as New York Stock Exchange, London Stock Exchange, etc., also forced implementing some changes in technical processes that required longer time.

For example,

• a second market was established,
• stock market operations with credit to the market were approved,
• important amendments to the stock markets Regulations were adopted,
• a regulation on takeover bids (OPAS – oferta públicas de adquisición) was adopted,
• the modernisation of securities’ settlement system – one of the major problems of the Spanish stock market at the time – was initiated,
• an annotated public debt market was designed and put into operation, and
• technical studies for the creation of continuous market were performed, whose operation began in 1989.

But the fundamental change, which represented the creation of a new legal and technical framework for securities markets, came about with the above-mentioned 1988 reform, namely the Act 24/1988, of 28 July on the Securities Market. The name of the regulation already indicates that it affects the securities markets in general, and not only the stock markets. However, much of its content and its further development has led to the organisation and operation of the stock markets. The main changes introduced by the 1988 Act, as indicated in the relevant preamble, are the following:

• Creation of the National Commission of Securities Market, the CNMV, as a supervising and inspective entity of these markets.
• Recognition of freedom to issue of securities without the need of prior approval.
• Establishment of three categories of official secondary markets