Clearing & Custodial Services

-------------A clearing house is for derivatives NOT equities ------------
A clearing house stands between two clearing firms (also known as member firms or clearing participants) and its purpose is to reduce the risk of one (or more) clearing firm failing to honor its trade settlement obligations. A clearing house reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (a.k.a. margin deposits), by providing independent valuation of trades and collateral, by monitoring the credit worthiness of the clearing firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting clearing firm's collateral on deposit.

Once a trade has been executed by two counterparties either on an exchange, or in the OTC markets, the trade can be handed over to a clearing house which then steps between the two original traders' clearing firms and assumes the legal counterparty risk for the trade. This process of transferring the trade title to the clearing house is called novation. It can take fractions of seconds in highly liquid futures markets; or days, or even weeks in some OTC markets.

-------custodian bank is for equities NOT euity-derivatives----------------
A Custodian bank, or simply custodian, is a specialized financial institution responsible for safeguarding a firm's or individual's financial assets and is not likely to engage in "traditional" commercial or consumer/retail banking such as mortgage or personal lending, branch banking, personal accounts, ATMs and so forth. The role of a custodian in such a case would be to:

* hold in safekeeping assets/securities such as stocks, bonds, commodities such as precious metals and currency (cash), domestic and foreign
* arrange settlement of any purchases and sales and deliveries in/out of such securities and currency
* collect information on and income from such assets (dividends in the case of stocks/equities and coupons (interest payments) in the case of bonds) and administer related tax withholding documents and foreign tax reclamation
* administer voluntary and involuntary corporate actions on securities held such as stock dividends, splits, business combinations (mergers), tender offers, bond calls, etc.
* provide information on the securities and their issuers such as annual general meetings and related proxies
* maintain curreny/cash bank accounts, effect deposits and withdrawals and manage other cash transactions
* perform foreign exchange transactions
* often perform additional services for particular clients such as mutual funds; examples include fund accounting, administation, legal, compliance and tax support services
* provide regular and special reporting on any or all their activities to their clients or authorized third parties such as MAIC Trust Account services for mergers & acquisitions payments.