Settlement and clearing accounts

A settlement account and a clearing account are the two accounts that sit between banks, and they do different jobs. A settlement account holds the funds that a bank owes to, or is owed by, a clearing system or a central bank, and it is settled in central bank money at the end of a cycle. A bank may hold a settlement account at the central bank for T2, a settlement account at a clearing house for a retail system, and a clearing account for each scheme it participates in, and each account is reconciled against a different statement. Source: Bank for International Settlements, Committee on Payments and Market Infrastructures; European Central Bank, TARGET services. The mechanism is netting and settlement, and the accounts make it visible. At the cut-off the system nets the positions, so a bank that sent EUR 100 million and received EUR 90 million has a net debit of EUR 10 million. The net amount is then settled through the settlement account at the central bank, so the bank reserve account falls by EUR 10 million, and the clearing account is cleared to zero. The settlement account is the record of what is owed to the central bank, and the clearing account is the record of what was in transit. A bank that confuses the two will reconcile the wrong balance against the wrong statement and will miss a break. A worked example with real numbers shows the cycle. On Monday it sends 10,000 payments totalling EUR 80 million and receives 9,500 payments totalling EUR 75 million. Its clearing account shows a net debit of EUR 5 million at the 15:00 cut-off. On Tuesday a payment of EUR 200,000 arrives after the cut-off, so it stays in the clearing account overnight and is included in Tuesday netting, and the clearing account shows EUR 200,000 at the close on Monday, which is correct, because the item is genuinely in transit. The test is that the clearing account at the close equals the sum of the items that arrived after the cut-off and have not yet settled. The parties are the bank, the clearing house or scheme operator, and the central bank, and each holds a different account. The clearing house holds a settlement account for each participant and calculates the net positions. The central bank holds the reserve accounts and moves the settlement amounts. The messages that report the accounts are the camt.052 intraday report and the camt.053 end of day statement for the settlement account, and the clearing file for the clearing account, which is often a proprietary file rather than an ISO 20022 message. The reconciliation must match the clearing account to the clearing file, and the settlement account to the central bank statement, and the two reconciliations must agree with each other through the net settlement amount. Failure is a settlement failure, and it is one of the most serious events in payments. If the central bank settlement system is down, the net amounts cannot move, and the clearing accounts stay open until the system recovers. If a clearing account does not clear to zero, it means a payment was recorded in the clearing account but not included in the netting, or was included twice, and the investigation starts with the clearing file, not with the settlement account. The Bank for International Settlements Principles for Financial Market Infrastructures set the standard for how a system must handle a participant default, and a bank must know the rules for every system it uses. The effect on the bank, the customer and operations is that settlement accounts are liquidity and clearing accounts are control. For the customer, a settlement failure can delay a payment by a day, and the customer must be told the new value date. For operations, the clearing account is the control total: it must be zero at the end of a cycle, except for items that arrived after the cut-off, and any other balance is a break. A business analyst must specify the cut-off, the netting rule, the settlement timing, the default procedure and the reconciliation for each system, because the product cannot be operated without them. For a business analyst, product owner or subject matter expert, the test is to trace a payment from the clearing account to the settlement account and to name the system, the cycle, the cut-off and the default rule at each step. Ask what happens when a payment arrives after the cut-off, when a participant defaults, when the central bank system is down, and when the clearing account does not clear to zero. Ask how the net amount is calculated, who calculates it, and what message or file proves it. The ISO 20022 pacs.009 financial institution credit transfer moves the settlement amount between banks, and the camt.053 statement proves it arrived, so the requirement must name both, or the settlement will be a manual process that cannot be reconciled automatically. Two mistakes are common and must be avoided. The first is to treat the clearing account as a settlement account, which understates the liquidity need, because the clearing account shows gross in-transit items while the settlement account shows only the net amount due. The second is to assume that a payment credited to a customer is settled, when it has only been cleared and the interbank settlement is still to happen, which overstates finality and understates risk. The correct design is to show the customer the credit, to hold the interbank settlement as a separate step with its own timing, and to reconcile the clearing account to zero and the settlement account to the central bank statement every day, with any difference escalated as a break before the next cycle starts. Takeaway: a clearing account holds items in transit and must clear to zero at the end of a cycle, and a settlement account holds the net amount owed to or by the clearing system and settles in central bank money. Netting turns gross flows into a single net settlement, and a participant default or a central bank outage is handled by the system rules. Further reading: Bank for International Settlements, Principles for Financial Market Infrastructures; European Central Bank, TARGET services; Bank for International Settlements, Committee on Payments and Market Infrastructures, A glossary of terms used in payments and settlement systems. Last reviewed 7 November 2026.