Clearing vs settlement: how do they differ?
Clearing is the step that reconciles and confirms a transaction and fixes what each party owes; settlement is the step that discharges the obligation through the transfer of money, securities or both. Clearing comes first and settlement second. The German terms are Clearing and Abwicklung.
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Clearing and settlement in brief
| Terms | Clearing and settlement. German: Clearing and Abwicklung. |
|---|---|
| Legal source | Settlement: Article 2(1)(7) of Regulation (EU) No 909/2014 (CSDR). Clearing: Article 2(3) of Regulation (EU) No 648/2012 (EMIR). |
| Payments in euro | T2, the real-time gross settlement system of the Eurosystem, since March 2023. It replaced TARGET2. |
| Securities in euro | T2S, with 24 central securities depositories from 23 countries and about 800,000 transactions a day (ECB). |
| Settlement cycle | Two business days after the trade (T+2) under Article 5(2) CSDR. One business day (T+1) from . |
What is clearing in banking?
Clearing in banking is the exchange and reconciliation of payment orders between banks before the money moves. The ECB glossary defines clearing as "the reconciliation and, in some cases, confirmation of transactions prior to settlement, potentially including their netting and the establishment of final positions for settlement".
Netting reduces many payments to one amount. If bank A owes bank B 100 million euros and bank B owes bank A 70 million, netting leaves one payment of 30 million from A to B. The clearing meaning in finance is wider for futures and options: there the ECB counts the daily balancing of profits and losses and the daily calculation of collateral as clearing. EMIR defines clearing for this market as "the process of establishing positions, including the calculation of net obligations" and of securing the exposures with collateral.
What is settlement in finance?
Settlement in finance is the completion of a transaction: the money or the securities change hands and the obligation ends. The settlement definition in finance in the ECB glossary reads "the completion of a transaction or of processing with the aim of discharging participants' obligations through the transfer of funds and/or securities".
The settlement date is the day on which settlement actually takes place. A settlement is final when it is unconditional, enforceable and irrevocable, even if a participant goes insolvent.
What is settlement risk? The ECB defines it as the risk "that settlement in a transfer system will not take place as expected, usually owing to a party defaulting on one or more settlement obligations". Its sharpest form is principal risk: the seller delivers the securities and never receives the payment, or the buyer pays and never receives the securities.
Clearing vs settlement in payments and in securities
Clearing vs settlement in payments and in securities follows the same order: clearing calculates the obligations, settlement discharges them. Clearing and settlement explained side by side:
| Clearing vs settlement | Clearing | Settlement |
|---|---|---|
| What happens | Orders are matched, confirmed and often netted | Money or securities move between accounts |
| Result | Final positions: who owes what to whom | The obligation ends |
| Payments | A clearing house or clearing system | A settlement system, for large euro payments T2 at the central bank |
| Securities and derivatives | A clearing house, often a central counterparty (CCP) | A central securities depository (CSD), in the euro area on T2S |
| EU law | EMIR for CCPs | CSDR for CSDs |
Settlement vs clearing can happen in one system or in two. T2 processes and settles each payment in one step, while a CCP clears a trade and a CSD settles it later.
What is TARGET2, and what is T2?
TARGET2 was the real-time gross settlement (RTGS) system of the Eurosystem until March 2023, when T2 replaced it. TARGET2 vs T2 is therefore old vs new: T2 does the same job with two parts, central liquidity management (CLM) and RTGS.
What is a payment and settlement system? The ECB describes an RTGS system as one "in which processing and settlement take place on a transaction-by-transaction basis in real time". T2 settles each payment order one by one in central bank money, with immediate finality and without an upper or lower limit on value. Every eight days it processes euro payments with a total value close to the annual GDP of the euro area. T2 uses the ISO 20022 message standard and is closed on Saturdays and Sundays. Instant payments at any hour settle in TIPS; see What are instant payments?
What is TARGET2-Securities (T2S)?
TARGET2-Securities is the Eurosystem platform on which securities and cash are exchanged at the same moment, delivery versus payment. Under delivery versus payment the securities move only if the payment moves too. The ECB writes that T2S reduces the settlement risk of securities transactions in this way.
A market participant needs a securities account at a CSD connected to T2S and a cash account at a national central bank. T2S settles in euro and Danish krone. The fee is 0.195 euro per delivery-versus-payment instruction plus a temporary surcharge of 0.04 euro (ECB, T2S). From , trades on EU trading venues settle one business day after the trade, under Regulation (EU) 2025/2075.
Clearing and settlement in Germany, Austria and Switzerland
In Germany and Austria, EMIR and CSDR apply directly. The Deutsche Bundesbank and the Oesterreichische Nationalbank are part of the Eurosystem, so banks in both countries settle large euro payments in T2 and securities in T2S. BaFin supervises central counterparties and central securities depositories in Germany, the FMA in Austria.
Switzerland is outside the EU, so EMIR and CSDR do not apply there. Clearing and settlement fall under the Financial Market Infrastructure Act (FinMIA), and FINMA supervises central counterparties and central securities depositories. Payments in Swiss francs settle in Swiss Interbank Clearing (SIC), an RTGS system that SIX Interbank Clearing has operated on behalf of the Swiss National Bank since (SNB, SIC). This page gives no legal advice.
Sources
- European Central Bank: Glossary, entry "clearing" and entries "settlement", "settlement day" and "settlement risk", read on
- European Central Bank: Glossary, entry "delivery versus payment", "principal risk", "final settlement" and "real-time gross settlement system", read on
- European Central Bank: What is T2?, read on
- European Central Bank: What is TARGET2-Securities (T2S)?, read on
- European Union: Regulation (EU) No 909/2014 on improving securities settlement and on central securities depositories,
- European Union: Regulation (EU) 2025/2075 as regards a shorter settlement cycle in the Union,
- European Union: Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories,
- FINMA: Financial market infrastructures, read on
- Swiss National Bank: The Swiss Interbank Clearing (SIC) payment system, read on