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section deals with the policy issues by reference to the principles described for trading systems and The Group of Thirty proposals.

BoxL9 ClMeaance *-n-R Settlement of Securities Transactions A clearance system determines what securities trading counterparties owe and what they are due to receive. It consists of comparison of the details of a trade 2s reported by each party to determine if they agpee, and then calculation of the amount owed to etch. Clearance is followed by settlement - the exchange of securities and funds to complete'the transaction. There are three types of clearance and settlement system: (i) trade for trade; (ii) daily netting; and (iii) continuous net settlement.

Trade for trade is the most fundamental form of clearance. The buyer ensures that cash or a cash equivalent is available for the seller and the seller ensures that the securities are held in deliverable form. The two then exchange securities and funds through some agreed mechanism. The identity of the counterparty is known and exposure to various counterparties can be monitored. But because the trade for trade system generates one long chain of trades, settlement conditions have to be fulfilled at every link in the chain for it to hold: when one transaction collapses. others are affected.

Where trading volume is large, some form of netting system is needed to reduce the number of clearance transactions required and therefore reduce the likelihood of failed transactions passing down the chain. The simplest form is daily netting, of which there are two types: (i) bilateral; and (ii) multilateral. Under bilateral netting each party has one net clearance a day with each counterparty. Multilateral netting nets the transactions in each security so that parties have one net clearance a day covering all buys and sells in that security.

Continuous net settlement is a refinement of multilateral daily netting in which daily netting is employed and all open transactions at the end of the day are offset against the next day's trades. One of the major elements of the system is that a clearing agency interposes itself between the counterparties, becoming itself the counterparty to each transaction. Individual parties to a trade are thus protected. Continuous net settlement may be on a "rolling" or an "account day" basis. In the latter all trades in a certain period settle on a specific day while in the former all trades settle a set number of days after the day they are transacted.

The exchange of physical share certificates adds to the complexity of the settlement process and makes it more difficult to obtain the maximum efficiency gains possible. For this reason, some form of book entry settlement is desirable in which credit, debit and balance records are taken as sufficient evidence of title to securities and physical transfer of securities is minimized or eliminated. This may be achieved in two basic ways: (i) immobilization; or (ii) dematerialization. In the first, share certificates are retained but are held in a central depository; in the second share certificates are completely eliminated.

Payment too may be by book entry debits or credits (electronic funds transfer) rather than by exchange of cheques or other instruments. This has the advantage of avoiding possible failure to honor cheques or delays in the clearance of cheques.

Annex V provides a more detailed description of approaches to clearance settlement.