Settling and clearing fixed income securities involves matching a buyer with a seller for mutually agreed upon pricing and terms. A fixed income security delivers a fixed rate of return at predetermined intervals. If you loan money as a business with regular payment intervals, this is a fixed income security. You probably know these securities as government and private bonds and corporate bank debt. Sometimes preferred stock can be a fixed income security.
Fixed income trade settlement and clearing takes this debt and provides a trading mechanism on the open market. This makes the process efficient, less risky and usually more profitable than it would be otherwise. This market for fixed income securities has also gone beyond the traditional bonds and stocks. It now includes mortgage-backed securities and collateralized debt obligations, or CDOs. Banks, mortgage companies and insurance companies issue these for varied reasons such as capital relief and risk management. The clearing and settlement process maintains order within these varied transactions. Before your business makes use of these entities, there are a few items to consider:
1. Understand the fixed income clearance and settlement market.
2. Become a member of a fixed income financial association.
3. Seek the counsel of a fixed income clearance and settlement specialist.
Action Steps
The best contacts and resources to help you get it done
Examine the process of fixed income clearing systems
Before you use a service or product, it is prudent to understand the market in which it operates. The clearing and settlement procedures are just a small part of the larger market in which these securities trade.
I recommend: Register for a free trial subscription to the
Journal of Fixed Income, which details everything you need to know about the market. View the fixed income tutorial provided by
Prudential Financial Services.
Join a cleared fixed income financial association
A membership in a fixed income association can open your business to other opportunities within the industry. At the very least, you can receive feedback from other members on the best clearing services.
I recommend: Call the
Bond Dealers Association about a potential membership and the contact information for a local representative who may be able to recommend a clearing service. Apply to become a member of the
Securities Industry and Financial Markets Association.
Employ the services of a clearing and settlement process company
If your company chooses to outsource the settlement of fixed income securities, you need to research the primary companies that participate in the fixed income market. Choosing a firm with an unknown history can lead to a loss in market value or an unhappy customer.
I recommend: Contact
Depository Trust and Clearing Corporation, which is the largest fixed income clearing corporation in the US, for information of their services. For foreign fixed income settlement and clearing you should consult the website
Clearstream.com.
Tips & Tactics
Helpful advice for making the most of this Guide
- Before you employ the services of a fixed income clearing and settlement service, it is good idea to ask for a list of client references to whom you can ask about the fixed income settlements company.
The official source of Fixed Income Clearing and Settlement is
the Fixed Income Clearing and Settlement page at Business.com
Related Resources from Business.com
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