clearing house system

clearing house system

a centralized mechanism for settling indebtedness between financial institutions involved in money transmission and dealers in commodities and financial securities. In the case of UK commercial banking, for example, the London Clearing House collates all of the many thousands of cheques drawn, transfers bank deposits from one bank to another, cross-cancels them, and calculates the net balances owing or receivable for each bank. The COMMERCIAL BANKS' balances at the Bank of England are then debited or credited as appropriate. A similar ‘clearing’ function is performed in the commodities and financial securities market by, for example, the International Commodities Clearing House and the London Financial Futures Exchange and TAURUS. See FINANCIAL SERVICES ACT 1986, FINANCIAL SYSTEM, BANKING SYSTEM, COMMODITY MARKET, STOCK MARKET, FORWARD MARKET.

clearing house system

a centralized mechanism for settling indebtedness between financial institutions involved in money transmission and dealers in commodities and financial securities. For example, in the case of UK commercial banking, when a customer of Bank A draws a cheque in favour of a customer of Bank B, and the second customer pays in the cheque to Bank B, then Bank A is indebted to Bank B for the amount of that cheque. There will be many thousands of similar transactions going on day by day, creating indebtedness between all banks. The London Clearing House brings together all these cheques, cross-cancels them and determines at the end of each day any net indebtedness between the banks. This net indebtedness is then settled by transferring balances held by the COMMERCIAL BANKS at the CENTRAL BANK (BANK OF ENGLAND).

A similar ‘clearing’ function is performed in the commodities and financial securities market by, for example, the International Commodities Clearing House and the London Financial Futures Exchange. See STOCK EXCHANGE, FUTURES MARKET, COMMODITY MARKET.

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