CoachSettlement is the final exchange of what was traded: securities move to the buyer, cash to the seller, and the trade can no longer be undone. Clearing is everything between execution and settlement: confirming the terms, computing who owes what to whom, netting, and managing the risk that a party fails before it has paid or delivered.
Examples
Example 5.9 (Why the call came)
Apply the method to a broker whose customers bought, net, $1 billion of a stock: with , , , million. If the stock’s volatility jumps to 25% a day the same position requires $824 million, and doubling the position doubles it again. In January 2021 the volatility component of the retail broker’s requirement was about $1.3 billion, to which the clearing house’s formula added an “excess capital premium” of $2.2 billion because the requirement dwarfed the firm’s capital. The clearing house waived that premium the same morning, for this firm and others: $9.7 billion in total across its members that week, according to the congressional investigation. The broker restricted purchases in the stocks concerned — the only way it had to stop the requirement from growing — and set out the same week to raise $3.5 billion of new capital. Shortening the cycle to divides such a requirement by : that, not convenience, was the argument for it.
Example 5.12 (September 2008)
When Lehman Brothers defaulted on Monday 15 September 2008, the London clearing house for interest-rate swaps held its portfolio: 66 390 trades with a notional value of $9 trillion in five currencies, against about $2 billion of initial margin. Traders seconded from member banks hedged the portfolio alongside the clearing house’s risk team; between 24 September and 3 October the hedged currency portfolios were auctioned. The clearing house reported that the default was managed well within the margin held and that its default fund was not used. The episode became the standard argument for the clearing mandates that followed.