The Evolution of Clearing Services: From Paper-Based to Digital

While we take clearing services for granted, the first modern bank clearinghouse in London can be traced back to the 1700s. However, in reality, clearing services were already in use hundreds of years earlier, with particular emphasis on trade in the Far East. In essence, a clearing service adds stability to any financial system and efficiency to any market. A clearing house effectively guarantees settlement by holding collateral and funds to cover both sides of a transaction. 

 

As investors will know, if investors have no trust in a market and the associated clearing services, there is no future. It really is as simple as that.

 

Paper clearing services to electronic

 

There have been considerable developments in clearing services over the last few hundred years. In the early days, everything was paper-based, which took time, and there were obvious capacity issues. However, the electronic revolution began in the 1970s and 1980s, and electronic clearing servicesemerged. New technology brought about the introduction of electronic trading platforms and messaging systems, which tackled and resolved the issue of time delays.

 

It is fair to say that without electronic clearing services and trading platforms, it is unlikely that we would have seen the 1980s investor revolution extended to the modern day. One of the central pillars of the investor revolution was the role of clearing houses which gave tremendous confidence to investors. So, we had real-time pricing together with digital clearing houses, which were extremely fast.

 

Advantages of digital clearing services

 

While the 1980s will go down as a pivotal time for global stock-market investment, we have seen considerable advances in digital clearing services since then. There are numerous benefits to take into account, such as:-

 

• Prompt settlement of transactions
• Reduced costs
• Increased security

 

Historically, investors would settle on a trade date +10 working days (T+10), although these could be extended for certain trading accounts. While it was possible to match up settlement dates for reinvestment purposes, there was always a degree of risk that the paperwork may be delayed. Settlement would eventually be honoured, but the process could be much longer for some stocks, sometimes injecting a degree of concern in smaller illiquid markets.

 

Nowadays, settlement periods of T+2 are relatively commonplace, and in some markets, they can be even quicker. However, it is essential to note that the efficiency and accuracy of modern-day digital clearing services are crucial.

 

Current developments in digital clearing services

 

It is vital to appreciate the broader market when looking at digital clearing services - even if our primary interest is in stock-market clearing services. In recent years we have seen the use of distributed ledger technology, the most common form of which is blockchain. This allows the creation of near-impregnable ownership records allowing transactions to be traced back to day one. 

 

In recent years we have also seen the introduction of fast payment banking services which allow for the immediate transfer of funds between banks. These are clearing systems we take for granted today but have taken literally hundreds of years to develop. As we touched on above, while speed is very much of the essence, reliability is very important.

 

Challenges and risks

 

The new era of digital clearing services has also brought about several challenges such as:-

 

• Cybersecurity threats
• Standardisation of systems

 

There has been much movement on both issues, with standardisation an ongoing challenge, allowing different services to communicate seamlessly. Cybersecurity is crucial whether looking at an in-house computer system or a digital clearing service. While great strides have been made in this area, staying one step ahead of the crooks is a constant battle.

 

Summary

 

From the days of the Silk Road trade routes to modern electronic trading platforms, clearing services and market confidence have been crucial. The speed at which stock-market settlement is carried out today bears no resemblance to that of just 30 or 40 years ago. Quite how clearing serviceswill look in 20 or 30 years is anyone's guess, but new technology is emerging regularly. Improving efficiency and speed is essential, but accuracy and reliability are also crucial pillars of future clearing services.

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