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Behind the money market: Clearing and settling money market instrument 
(Source: David L. Mengle)

Where banks fit in
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Whenever a money market instrument is traded, some means must exist for transferring the instrument and for making payment. In other words, there is a necessity for clearing and settling the trade, tasks that are usually referred to as operational, or back-office, functions.

Clearing:  it refers to processing a trade and establishing what the parties to the trade owe each other. Settlement refers to the transfer of value between the parties so the trade is completed (Group of Thirty 1989, p. 35).  In the clearing and settlement process the first step  involves conveying the details of the trade from traders to the back office. Second, the details must be compared and matched between the buyer and seller to ensure that there is an agreement between the buyer and seller regarding what is to be traded and the terms thereof. Failure to do so might lead to delivery problems. 

The participants in the money market are linked by clearing and settlement systems.  

Where banks fit in

At the center of the clearing and settlement mechanism for the money market are banks and the interbank payment system.  Banks connect the participants in the money market by acting in three capacities. First, banks act as agents for issuers of money market instruments, they therefor perform the physical tasks of issuing and redeeming instruments in the market and of maintaining registration records. Second, banks act as custodians of instruments: they render their services as safekeepers of instruments to investors.  The bank's balance sheet does not show  like valuables kept in a safe-deposit box,  or instruments entrusted to a custodian bank, as either assets or liabilities because they remain the property of their owners.

Finally, and most importantly, some banks specialize in clearing.  The responsibilities of a clearing bank is the transferring of securities from one party to another and for transferring payment for securities.  Two types of accounts are maintained by dealers at clearing banks:  securities account and funds accounts.  When a clearing bank is instructed to transfer securities from Dealer A's securities account to that of Dealer B, the bank also transfers payment for the securities from Dealer B's funds account to that of Dealer A.  If the same clearing bank is not used by the dealer, the transaction then involves a transfer of securities and funds between two banks.

Transfers between banks take place at the hub of the .........................

More information is provided in the Member Area

Recommended further reading:
Cashing negotiable instruments 
The Money Market 
Security Identifiers (Screens) 
CUSIP Security Identifier (Screen) 
Discounting of bank guarantees (BG's) 
Books on Financial Instruments