Clearing house funds are transmitted through the Federal Reserve System via personal or commercial checks. The central processing mechanism records the receipt of the check, makes a tentative demand on the customer’s account, and holds the funds until the check clears. The processing time varies based on the number of banks involved. Orders may be executed without waiting for the clearinghouse funds to be posted if the customer meets certain financial criteria.
Compensation funds are resources that flow through the banks of the Federal Reserve System. The instrument of transmission is normally a personal check from an individual client or a commercial check from a firm that is a direct client of the clearing house or is a clearing member. The primary function of clearing house funds is to verify receipt of funds in a manner that is documented from the point of receipt through clearing of funds for use.
The formula for processing clearing house funds is relatively simple. All transactions go through what is called a central processing mechanism. The mechanism includes components that help record the receipt of the check, make a tentative demand on the account balance for the customer, and then hold the funds until the check clears the issuing bank. Once the check has cleared, the clearing house will post the funds to the customer’s account and may use the balance to honor customer orders.
The clearing house’s overall funds processing process will vary, based on the number of banks involved and the processing speed associated with the check. When the clearing house and the customer both use the same banking institution, the clearing house’s funds may be available for use within one business day. However, if more than one bank is involved, the entire process can take two to five business days.
Depending on the relationship between the client and the clearinghouse, orders may be executed without waiting for the clearinghouse funds to be posted. This can occur if the clearinghouse’s procedures permit the extension of short-term credit to customers who meet certain financial criteria. Extension of credit is a privilege subject to review from time to time and may be revoked in the event a customer check fails to clear due to insufficient funds.
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