What is a clearing houseWhat is a clearing house? A clearing house is a financial... More?
A clearing house is a that provides clearing and settlement services for financial transactions. This means it an intermediary between buyers and sellers, acting as a buyer to the seller and vice versa, to ensure they fulfil their legal obligations to each other.
Once a trade has been executed by two counter-parties either on an or in the , the trade can be handed over to a clearing house which then steps between the two original ‘ clearing firms and assumes the legal counter-party risk for the trade.
The clearing firms are the direct clients of the clearing house, for example, .
The purpose of the clearing house is to reduce the risk of the clearing firms failing to honour their obligation in settling a trade.
Clearing houses need to be well-managed and possess a lotIn forex trading, a lot is the standard unit to measure the ... More of capital to fulfil their role. The benefit of the clearing house can be seen simplified as an insurance company for trading: you pay a bit of moneyMoney is a generally accepted medium of exchange to buy and... More, but get the safety that your trades are working properly.
This process of transferring the trade title to the clearing house is called “novation”. It can take fractions of seconds in highly futuresA future is a contract between two parties to purchase a c... More markets. It can also take days or even weeks in some OTC markets.
Clearing houses are usually a division of an exchange, which enables the exchange to manage every step of an executed trade.
