Clearing is the process of checking transaction records and determining obligations before settlement. It can include matching details, reconciling records and calculating the funds or assets that each participant must deliver.
How netting changes obligations
Some clearing arrangements offset compatible obligations instead of settling every payment separately. Suppose A owes B 100 units and B owes A 70 units of the same currency, both due at the same time. If their agreement permits netting and fees are ignored, the net amount is 30 units from A to B. Netting reduces transfers; it does not create a trading profit.
A central counterparty may stand between buyers and sellers and manage exposures using margin and default procedures. Clearing does not always require such an institution, and risk management does not eliminate every possible loss.
Clearing versus settlement and liquidation
Clearing establishes what is owed; settlement fulfills those obligations. For derivatives, clearing can also involve updating gains, losses and collateral requirements.
Liquidation is a different concept: it may mean closing positions or selling assets, including when collateral is insufficient. Crypto platforms and protocols can combine parts of these processes differently. Their terminology and rules need checking before assuming that a balance update, forced closure and final transfer are the same event.