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Clearing members are companies or individuals with membership in a clearinghouse, responsible for executing trades and meeting obligations on behalf of clients. They must meet financial requirements and assume some degree of risk.
Clearing members are individuals or companies that hold a certain class of membership in a clearinghouse. The vast majority of clearinghouse memberships are held by companies, due to the membership requirements that most clearinghouse organizations have. The privileges extended to the clearing member include the ability to buy and sell underlying securities in accordance with current regulations.
Along with the privileges associated with client trades, the clearing member also assumes responsibility for all trades that are executed under the terms of the membership. In the case of a company that is a clearing member, the company will be responsible for supporting all obligations associated with executing orders on behalf of its clients. The clearing member generally makes arrangements with the client to ensure that obligations to the clearinghouse are fulfilled in a timely manner.
The clearing member will need to meet a number of requirements based on cash flow and a generally strong tax position. Because a clearing member can accept trades that are executed on the floor of an exchange, this condition of verifiable financial strength is understandable. A strong cash asset base helps ensure that the clearinghouse can place a fair degree of trust in the member. At the same time, the clearing member’s clients can be sure that they are executing orders through a reliable and stable entity.
A clearing member also assumes a certain degree of risk. In the event that a client of the clearing member is unable to meet its obligations for any reason, the clearing member is still responsible to the clearinghouse for settling the debt. Once the matter is closed with the clearinghouse, the clearing member is free to pursue the appropriate legal recourse to the compensation of the defaulting client. However, the clearing member may be unable to collect the outstanding balance from the client. When this is the case, the loss may be partially covered by insurance, or written off as a bad debt or loss for tax purposes.
Smart Asset.
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