Clearing agreements are divided into two categories -- bilateral trade agreements and clearing member trade agreements. Clearing member trade agreements allow an investment broker to represent his client and choose the brokers that will be involved in the agreement. These agreements allow investors to employ a variety of investment options through different brokers while consolidating trade orders through a single broker.
Model B clearing agreements involve a contract for brokering services between the customer and the broker, and a contract for custody services between the broker and the custodian. Income flows from the custodian to the customer, and the custodian is responsible for reporting income flows to individual customers.
Model A Vs. Model B
Model A agreements use a contract for brokering and custody services between the customer and the broker, and a sub-contract for custody services between the broker and the custodian. Also, unlike model B agreements, payments flow from the custodian to the broker and from the broker to the customer. The custodian reports nothing unless the broker is an individual or partnership. The broker only reports income flows to the customer if the customer is an individual.