20 October 2022
Whether looking at clearing services in isolation or as part of more comprehensive clearing and custody services, investors should be aware of their importance. Since stock markets were opened up to the broader public, traders, and long-term investors, many of us give little consideration to clearing and custody services. However, they are at the heart of any investment market!
When looking at clearing services, many people confuse this with settlement. Clearing services is the process of updating various customer/broker accounts and preparing the transfer of stock and monies. Settlement is the end process, that moment when securities and funds are exchanged. Even with this brief summary, it is not difficult to see how essential clearing services are to markets.
Since the introduction of systems such as CREST (Certificateless Registry for Electronic Share Transfer) many of us take custody services for granted. We buy and sell shares, and our broker arranges the transfer of funds/securities. No forms, no delays and the ability to reinvest funds almost immediately. However, there is more to modern-day custody services.
Here at Global Investment Strategy, we have custody partners across all the major markets. This allows our clients to deal not only in their domestic market but also in many international markets. Investors must ensure that their global assets are held safely and delivered promptly when considering clearing and custody services. We tick all of the boxes.
Clearing and custody services are central to any investment market. The orderly settlement of transactions and transfer of funds and securities help with liquidity, attracting private investors and institutional clients. Electronic share transfer systems are a game changer for the industry. The ability to settle transactions, sometimes same day, but the standard is often T+2, ensures that everybody knows where they stand.
When looking at market efficiency, liquidity plays a significant role in the efficient pricing of stocks and shares. If markets are illiquid, unorderly and unreliable, this will influence trading prices and volumes. The greater the input, whether through direct trading or analyst coverage, the more efficient the asset price. So, orderly clearing and custodyservices also play a significant role here.
Orderly markets and price efficiency are heavily influenced by reliable clearing and custody services, all of which come together to promote investor confidence. Historically, many areas of the UK had regional stock markets which tended to service regional companies. Individually, these markets often struggled with liquidity problems. However, over time, we saw a strengthening of the London stock exchange whichplaced the cumulative liquidity of regional markets in one place. This significantly enhanced investor trust in markets and behind-the-scenes systems.
As we discussed above, holding assets electronically and via overseas third-party custodians have benefited investors and sped up the settlement process. That said, balancing the global reach for investors with the security of assets is crucial. This is why we only work with tier-1 third-party custodians with long-standing experience and an impeccable reputation. This ensures that all client assets are safe and secure at all times and assists with the efficiency of clearing services.
Historically, when a UK-based investor wished to deal in major US stocks, an ADR (American Depository Receipt) would likely be available. This was a way in which UK-based registrars could hold stock in a US company and issue a tradable form of ownership. However, due to considerable developments in clearing and custody services, investors can now deal directly with many overseas markets and hold stock locally. This is especially important as investors now take for granted access to international markets and the opportunity to trade 24/7.
While investors don't necessarily need to know the finer detail of international clearing and custody services, it is helpful to have a working knowledge. Recently, we have seen considerable developments in this area, with custody and clearing services at the heart of market integrity, efficiency and investor trust. There is much more going on behind the scenes than many people assume!Back to News