Clearing vs settlement: how do they differ?

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. For example, 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. In finance, the meaning of clearing 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.

Settlement in finance is the completion of a transaction: the money or the securities change hands and the obligation ends. The definition of settlement 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.

Settlement risk is, in the ECB's definition, 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.

In payments and in securities, clearing and settlement follow the same order: clearing calculates the obligations, settlement discharges them.

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.

TARGET2 was the real-time gross settlement (RTGS) system of the Eurosystem until March 2023, when T2 replaced it. TARGET2 is the old system and T2 the new one, doing the same job with two parts, central liquidity management (CLM) and RTGS.

An RTGS system is a payment and settlement system that the ECB describes 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; What are instant payments? has the details, explained step by step.

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 October 11, 2027, trades on EU trading venues settle one business day after the trade, under Regulation (EU) 2025/2075.

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.

The Deutsche Bundesbank, whose Central Office is in Frankfurt am Main, reported on February 7, 2017 that the German market had moved to T2S with its central securities depository Clearstream Banking AG, around 40% of the expected T2S transaction volume (Bundesbank). Since September 26, 2025 this CSD has been called Clearstream Europe AG, and it handles over 50% of the entire T2S volume (Clearstream).

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 June 10, 1987 (SNB, SIC). This page gives no legal advice.