It involves the management of post-trading, pre-settlement credit exposures to ensure that trades are settled in accordance with market rules, even if a buyer or seller should become insolvent prior to settlement.
STEP2, operated by the Euro Banking Association is a major pan-European clearing system for retail payments which has the potential to become a SIPS.
To clear the trades, time was required for the physical stock certificate or cash to move from Amsterdam to London and back.
With the advent of the computer in the 1970s and 1980s, there was a move to reduce settlement times in most exchanges, leading by stages to a current standard of one day, known as T+1.
Until this point, many exchanges would act as their own clearing house, however the additional computer systems required to handle large volumes of trades, and the opening of new financial markets in the 1980s, such as the 1986 big bang in the UK, led to a number of exchanges separating or contracting the clearing and settlement functions to dedicated organisations.
[2] Millions of transactions, valued in the trillions of dollars, are conducted between sellers and purchasers of goods, services, or financial assets daily.
Depository institutions can also use a correspondent relationship with a Fedwire participant to make or receive transfers indirectly through the system.
Participants generally use Fedwire to handle large-value, time-critical payments, such as payments to settle interbank purchases and sales of federal funds; to purchase, sell, or finance securities transactions; to disburse or repay large loans; and to settle real estate transactions.
Access to the Fed-wire Securities Service is limited to depository institutions that maintain accounts with a Reserve Bank, and a few other organizations, such as federal agencies, government-sponsored enterprises, and state government treasurer’s offices (which are designated by the U.S. Treasury to hold securities accounts).
The ACH Network is an electronic payment system, developed jointly by the private sector and the Federal Reserve in the early 1970s as a more efficient alternative to checks.
ACH debit transfers are used by consumers to authorize the payment of insurance premiums, mortgages, loans, and other bills from their account.