Banks
editBanks play two roles. Some banks are designated as clearing banks with whom members of a clearing corporation open clearing accounts. All settlement between the clearing member and clearing corporation relating to funds happens through debit and credit in this account only.
Investors and traders also maintain bank accounts, and fund-related settlements happen from these bank accounts. It is never mandatory for the investor and broker to have accounts in the same bank. Having a swift and robust banking infrastructure is highly desirable to enable initiatives such as STP and T+1 settlements. (STP and T+1 are marketwide initiatives to reduce the settlement period. We will discuss these in detail in subsequent sections of this chapter.) If transferring money from one account to another is enabled only through conventional methods such as checks and takes three days to clear, how can market participants honor their monetary obligations within one day or two days as stipulated by the T+1 and T+2 regimes? A lot of study and changes are being made/suggested in the banking sector so that it can meet this kind of challenge.
Banks play a crucial role in enabling online trading. Members enable online trading by providing a browser-based interface. Such members hook up with banks where investors are asked to open accounts. For any buy order that the investor places through the Internet, the trading system routes the order to the bank, which in turn debits the investor’s account to the extent of the value of shares purchased. Investors are required to maintain either a separate account or a normal account where the bank holds a power of attorney to debit the client’s account.