Clearing, Settlement and Custody Explained

Clearing, Settlement and Custody

After a trade, clearing confirms and guarantees it, settlement exchanges cash and securities and custody holds assets safely. Learn the process, T+1 and key players.

Advanced3 min readUpdated 3 Oct 2026

Lesson 36 of 44

When you click buy, the trade is executed in a fraction of a second, but the transaction is not finished. Behind the scenes, clearing confirms the details and manages the risk that either side fails, settlement actually exchanges the cash for the securities and custody keeps the assets safe afterwards. This post trade infrastructure is invisible to most traders, yet it is what makes markets safe enough to trade trillions of dollars a day between parties who do not know each other.

The post trade lifecycle#

Stage	What happens	Key players
Execution	Buyer and seller agree a price	Exchanges, brokers, venues
Confirmation	Details are matched and confirmed	Brokers, matching services. See Execution Reports and Trade Confirmations
Clearing	Obligations are calculated, netted and guaranteed	Clearing houses (CCPs). See Clearing Houses and Central Counterparties
Settlement	Cash and securities change hands	Central securities depositories, settlement banks
Custody	Assets are held and serviced	Custodian banks, brokers

Clearing#

A central counterparty (CCP) becomes the buyer to every seller and the seller to every buyer, a process called novation. If one party defaults, the CCP still honours the trade. CCPs protect themselves through initial margin, daily variation margin, default funds contributed by members and strict membership rules. Netting reduces the number and value of payments: a broker that bought and sold many shares of the same stock settles only the net difference.

Settlement cycles#

Market	Typical settlement
US stocks, corporate bonds and ETFs	T+1 since 28 May 2024
US Treasuries	T+1
EU and UK equities	T+2, with moves to T+1 planned for October 2027
Spot FX	Usually T+2 for most currency pairs
Futures	Daily mark to market cash settlement; final settlement at expiry. See Settlement
Crypto on exchanges	Internal ledger updates, near instant; on chain transfers depend on the blockchain

Shorter cycles reduce counterparty risk and margin needs but leave less time to fix errors. See Account Types and Margin Rules.

Key US infrastructure#

Institution	Role
DTCC	Holding company for key US post trade utilities
NSCC	Clears and nets most US equity trades
DTC	Central securities depository that holds securities and settles transfers electronically
OCC (Options Clearing Corporation)	Clears US listed options
CME Clearing, ICE Clear	Clear futures and some swaps

Custody#

Custodians hold securities on behalf of clients and handle related services: collecting dividends and interest, processing corporate actions, proxy voting, tax reclaims and reporting. Large institutional custodians include BNY, State Street and JPMorgan. For individuals, the broker usually acts as custodian, and in the US holds most securities in "street name" through DTC rather than in the investor's own name. See Market, Credit and Counterparty Risk.

When post trade breaks down#

Event	Lesson
Failed settlement (fails to deliver)	Often from short selling without borrowing shares on time. See Securities Lending and Stock Loan
Clearing margin spikes	In January 2021, clearing deposit requirements surged amid meme stock volatility, leading some brokers to restrict buying
Custodian or broker failures	Client assets can be tied up during bankruptcy proceedings

Frequently asked questions#

What is the difference between clearing and settlement?#

Clearing confirms, nets and guarantees trade obligations; settlement is the actual exchange of cash and securities.

What does T+1 mean?#

Settlement occurs one business day after the trade date, the US standard for stocks since May 2024.

What does a custodian do?#

Holds securities safely for clients and handles dividends, corporate actions, proxy voting and reporting.

Next, learn how shares are borrowed and lent in Securities Lending and Stock Loan.

Check your understanding

3 quick questions on this lesson. Get them all right to finish it.

Turn on JavaScript to take the quiz.

Finished this lesson?Sign in to save your progress across devices.

Next lessonSecurities Lending and Stock LoanSecurities lending lets short sellers borrow shares from owners for a fee. Learn how stock loans work, collateral, borrow fees, recalls, risks and who benefits.