Clearing house

Clearing house (or central counter party clearing house) – A financial institution that helps facilitate trading done in futures markets. A clearing house acts as a third party to futures and options contracts – i.e., as a buyer to every clearing member seller, and a seller to every clearing member buyer. While clearing houses are responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data, their prime responsibility is to provide efficiency and stability to the financial markets they operate in. Clearing houses benefit both parties in a transaction, because they bear most of the credit risk. If two individuals deal with one another directly, the buyer bears the credit risk of the seller, and vice versa. When a clearing house is used, the credit risk that is held against both buyer and seller is held by the house.