Clearing Fee Definition

What is a clearing commission?

A clearing fee is a charge levied on securities transactions by a clearing house to transact using its own facilities. It is most commonly associated with futures trading and includes all actions from the time a commitment is made to the time a trade is settled.

Transaction fees often include both a brokerage fees and clearing fees, but rarely include delivery fees, as actual delivery of the underlying asset in a futures contract is rare. The actual cost of clearing fees may vary, as it is based on the type and size of the transaction. Fees are passed on to brokers by the exchange where the transaction was made.

Key points to remember

  • Clearing fees are charged by the party that guarantees the transaction, the clearinghouse.
  • The role of the clearinghouse is to minimize the impact and concerns about the default.
  • Fees are very low, but variable, and usually passed on to exchange clients along with the commission fees they incur.

How Clearing Fees Work

To earn clearing fees, a clearing house acts as a third party to a transaction. From the buyer, the clearing house receives cash and from the seller, it receives securities or futures contracts. He then manages the exchange, earning a compensation fee for doing so. In today’s world of automated and high-speed trading, the need for clearing is often taken for granted, but the existence of the clearing house and its role allows traders and investors to dispel the concern that the party on the other side of their trade will somehow undo the effects of their trade by acting in bad faith.

A clearing commission is a variable cost, as the total amount of fees may depend on the size of the transaction, the level of service required or the type of instrument traded. Investors who make several transactions in a day can generate significant fees. In the case of futures contracts, clearing fees can add up for investors who make many trades in a single day, as long positions spread the fees per contract over a longer period of time.

Why clearing fees are necessary

Clearinghouses act as intermediaries in transactions to secure payment in the event that either party involved in the transaction defaults on the contractual obligations of the transaction. Technology, accounting, record keeping, assumed counterparty risk, and liquidity is what investors and traders pay with their clearing fees. This keeps the markets efficient and encourages more participants in the securities markets. consideration and pre-settlement risks are often taken for granted due to the role that the clearing house plays.

Clearinghouses are subject to significant oversight by regulators, such as the Commodity Futures Trading Commission (CFTC). Since Great Recession in 2007-2009, new regulations moved significantly more money through clearinghouses. As such, their failure could result in a significant market shock. At the end of 2017, the three main clearinghouses passed the liquidity stress tests by proving that they could maintain enough liquidity to settle obligations in a timely manner, even if their two main members (banks and brokers) were lacking.

Who charges the compensation fees?

The three largest clearing houses are CME Clearing (a unit of CME Group Inc.), ICE Clear US (a unit of Intercontinental Exchange Inc.) and LCH Ltd. (a unit of London Stock Exchange Group Plc).

Clearinghouses can trace their beginnings to around 1636; the financier of Charles I of England, Philip Burlamachi, first proposed them, along with the idea of ​​a central bank.

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