There is a vast range of industry terms used across global markets. Many of these terms can be confusing, with some overlap between the range of services and technicalities they describe. One instance of this is global clearing and safe custody services. Here we’ll take a look at some of the tasks that clearing firms and custodian firms take care of and the difference between the two.
What is a Clearing Firm?
Clearing firms, sometimes known as clearing corporations or clearinghouses, handle a range of operations that ensure that securities transactions are completed once a trade is submitted. They ensure that money and stocks reach their intended destination, serving as an intermediary between the buyer and seller accounts.
A clearing firm will handle nearly every transaction in a financial market and provide a vital function at the major exchanges. Almost every trade placed with a brokerage will be passed to an external clearing firm or internally in the case of self-clearing firms. The work of global clearing and safe custody services largely goes unseen. Still, they play a crucial role in limiting risk across the market by facilitating low-latency transactions, reducing the risk of market impact and building trust. You can’t trade without using the services of a clearing firm.
What is a Custodian Firm?
A custodian bank or firm provides safe custody services. They will often be a brokerage, a commercial bank or another type of institution that holds onto your money and investments for reasons of security and convenience.
They perform a similar set of functions to a clearinghouse, but they will also retain physical custody of the assets involved in any transaction. In an electronic market-based system, the buyer and the seller will never meet. They may even live on different continents. Therefore the custodian firm performs an essential function in ensuring that funds exist and will reach the right person in a transaction. They will take instructions to buy or sell something, finding another buyer or seller in the market at that time.
So What’s the Difference?
There’s a key difference between a custodian firm and a clearing firm in that the former retains safe custody of your assets, while the latter guarantees that the transaction will take place on time.
A custodian firm will provide a full range of back-office services that ensure transactions can take place, acting as a counterparty for all transactions that run through it. This removes the need for market participants to make a judgement call about their exposure to counterparty risk with any transaction.
A custodian service manages the movement of assets to appropriate parties but doesn’t accept any risk. The two services together help build trust and allow for smooth trade transactions, building confidence and a degree of dependability in markets.
Global Clearing and Safe Custody Services from GIS HK
At GIS HK, we offer post-trade, global clearing, safe custody and prime services across multiple currencies and in equities, fixed income, government securities and options.
Our services are backed up by a team that possesses unrivalled levels of experience and expertise. With our on the ground knowledge, we can provide services across a range of frontier markets, including Indonesia, Malaysia, Thailand and Vietnam, and access to Chinese listed securities via the Shanghai-Hong Kong Stock Connect system.
To find out more about our industry-leading global clearing and safe custody services, call +852 3018 3009 or email [email protected]