Clearinghouse is a professional entity whose work is being an intermediate between a buyer and seller in a financial market. The entity ensures the smooth financial transaction between buyer and seller, plays as a mid role for both party agreeing on the contract.
All the financial markets have a clearinghouse or internal clearing department who plays the same role.
Keypoints from the blog
- Understanding clearinghouse
- Work in futures market
1. Understanding clearinghouse
Major responsibilities of clearinghouse is collecting the margins, setlling trading accounts, finalization of trades , ensuring delivery of assets to the new buyers etc.
Clearinghouse acts as a third party which stays as an intermidiate. It acts as a buyer to every clearing member seller and as a seller to every clearing member buyer.
It enters into the picture after a buyer and seller executes a trade. Job of clearing house is finalize and validate the transaction. It provides the security and efficiency that is mandatory for stability in financial market.
Acting as a buyer and a seller at the inception of a trade means that they are subjected to default risk. To mitigate this, clearinghouse impose margins for the work.
2. Work in futures market
Futures market is highly dependent on clearinghouse because it’s financial products are in leverage. This typically involve borrowing in order to invest. This process require a stable intermediary.
Every stock exchange have it’s own clearinghouse. All members of an exchange are required to settle their trades through clearing house at the end of each trading session.
Stock exchanges like NYSE have clearing divisions that ensures a stock trader has enough money in an account to fund the trades which are placed.
This division acts as a middleman, helping facilitate the smooth transfer of the stock shares and the money.
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