Two distinct phases
Moving money has two phases. Clearing is exchanging the transaction details and computing who owes whom. Settlement is the actual transfer of funds that discharges those obligations. They happen at different times.
Why separate them
- Clearing can happen instantly while settlement runs on a batch cycle.
- Netting many transactions during clearing reduces the number of real transfers.
- The gap between them creates settlement risk that must be managed.
Net settlement
Instead of settling every transaction, parties net their mutual obligations and move only the difference. This cuts liquidity needs but concentrates risk into the netted figure.
Operational guidance
- Mark a transaction cleared before it is settled and track both states.
- Manage settlement risk during the window funds are owed but not yet moved.
- Reconcile the net figure against the underlying gross transactions.
Key idea
Clearing computes who owes whom while settlement actually moves the funds, often netted to reduce transfers.