Over the course of the last twenty years, globalisation has become the norm for most industries. Due to that, the need for global clearing and safe custody has skyrocketed.

Investopedia defines global clearing systems as “a trading system used when futures contracts or other eligible transactions occur on an international or an inter-country level.”

Our team here at GIS HK, a Hong Kong-based firm providing prime services, put together a quick explanation of how global clearing and safe custody operates.

How do clearing and safe custody services work?

On the date that a trade is completed, the buyer and seller enter into a contract to deliver a number of shares for an agreed cash amount. In this sense, it’s like any other form of transaction. While there are a number of stages to the entire process, it can be broken down into two broad components: execution and settlement.

What is execution?

Execution is the transaction whereby the seller agrees to sell and the buyer agrees to buy a security. This is a legally enforceable agreement rather than just a general intention. All of the processes leading to the settlement are called clearing, whereas settlement is the actual exchange of money, or some other value, for the securities.

What is clearing?

Clearing is the process of updating the accounts of the different trading parties. It’s when the transfer of money and securities is arranged. This can take place through bilateral clearing, where the parties arrange for the transfer to take place between themselves, or more usually through central clearing which uses the services of a clearinghouse.

What are global clearing and safe custody services?

Financial markets require high levels of trust and confidence if they are to operate effectively. Clearinghouses and clearing services are necessary for matching all of the buy and sell orders in the market. It provides confirmation of the transaction price, the date, and the identity of the buyer and the seller. They help to make the whole transaction much more clear and efficient as the parties interact with the clearinghouse rather than each other.

Clearinghouses are responsible for validating and finalising the transaction and ensuring that both parties honour their contractual obligations. The trade is no longer a contract between the buyer and the seller but rather a contract between the seller and clearinghouse, and buyer and clearinghouse. This is particularly important when it comes to international transactions, where trust and transparency are imperative.

Clearinghouses will also take care of all the bureaucracy involved with the buying and selling of stocks. When trades are taking place in international markets this can be more complicated, so having an experienced and knowledgeable body taking care of these aspects of trading is key. This will include any tax issues, foreign exchange or dividend payments that need to be carried out.

Custodians and depository institutions

The buyer and seller's custodians exchange shares for cash. If they both use the same custodian the process is a simple updating of an electronic record. If they use different custodians another body enters the process. Central Securities Depositories (CSD), sometimes known simply as depositories, act as a ‘Custodian of custodians’, an entity that provides a central point for depositing financial instruments such as shares. 

All of these processes are now carried out electronically and the movement of papers is rarely required. CSDs help to make the process of transferring assets safe and seamless.

What are prime services?

Prime services are a group of services that financial institutions offer to individuals and corporate investors. Prime services allow institutions to outsource some of the investment activities and to shift their focus onto their core activities.

Dedicated coverage

GIS HK Ltd provides dedicated coverage to clients in the Asia Pacific region. We offer full  24-5 coverage to institutional and professional clients. If you are interested in discussing our global clearing or safe custody services email us at info@gishkltd.com.