Liquidation of positions
The liquidation of positions is the process carried out by financial entities in their financial departments of back office to regularize the scoring positions of its clients with the market with the custodian of the securities or the depositary.
In addition, financial institutions have to regularize their positions on their balance sheets and on their income statement.
How do the settlement processes work?
Liquidation processes in banks have double accounting:
- On the one hand, that of the bank itself.
- On the other hand, the settlement with the market and clearing houses.
As in all accounting, the positions of balances and the number of titles must match and the deviations must be minimal.
In many cases, the purchase and sale of securities in the market can be settled in D + 1, D + 2 or D + 3 (generally settlements in SICAVs), however, the investor will be able to see the purchase or sale of the securities. titles on the spot, due to the fact that the Bank's internal accounting makes it possible to advance the accounting entries of the client's executions.
It is very important that the Bank has good professionals in the department of backoffice since their work requires being meticulous and, in some cases, it is considered of great technical complexity, especially when there are settlement problems due to falls in the routing of international securities and derivative products, since the notations are in foreign currency in most cases and the products that are traded are in OTC markets.
There are also settlement problems with securities that trade under the same ISIN (identification code) but in different currencies, or financial derivatives whose market issuers have little liquidity. This last case occurs with some warrants and ETFs that have little capitalization, generally less than one million euros.
It must be borne in mind that if the position cannot be liquidated it is a loss that the Bank has to assume since it is not going to take it away from the client.
Liquidation with the new reform of the stock market
Given the new reform of the stock market, settlements are made under single records that allow us to see more clearly if there has been an error in the settlement of a client. In many cases, it happens that the amount of the operation has not been withheld to be able to carry it out or, on the contrary, the balance has been withheld but the client requests the cancellation and it is not released, in such a way that the investor it does not have it available to be able to carry out another operation.