Clearing Member Trade Agreement - Explained
What is a Clearing Member Trade Agreement?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What is a Clearing Member Trade Agreement?
A clearing member trade agreement (CMTA) refers to an arrangement that allows an investor to enter derivative trades with different brokers but consolidates these trades with only one brokerage firm for the purpose of the clearing. Using the CMTA. A single trader can initiate trades such as options, derivatives, and futures with a limited number of brokerage firms but only one of the firms can clear the trade.
How Does a Clearing Member Trade Agreement Work?
In a clearing member trade agreement (CMTA) different brokers also reach an agreement that only one of them will clear a trade for a single client, regardless of whether the client enters derivative trades with all the brokers. With this agreement, a single investor can have trade relationships with many brokers at a time, but all the trades from different brokers is settled through only one brokerage firm. This agreement saves the investor from too close or clear each trade position with different brokers differently, instead, the brokers agree that the traders be cleared by one of them. In the process of consolidation, some brokers relinquish their position to the clearing firm or the brokerage firm responsible for the clearing of the trade.
Why Have a CMTA?
Oftentimes, investors or traders ask questions on the importance of a clearing member trade agreement (CMTA), the important benefits of the agreement are listed below;
- A CMTA enables an investor to initiate derivative trades with different brokers which offers a variety of options for their investment.
- A CMTA also enhances trade diversification given that an investor has the chance to explore different brokers for different purposes.
- A CMTA also enhances diversification of investment portfolio for investors and they can engage brokers in different sectors or industries in order to select the best trades.
- Also, CMTA offers an advantage to investors given that it reduces clearing costs, fees and commissions they would have paid to each of the brokers if they were to clear separately.