Clearing house (finance)


Clearing house (finance)

A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions. These transactions may be executed on a futures exchange or securities exchange, as well as off-exchange in the over-the-counter (OTC) market. A clearing house stands between two clearing firms (also known as member firms or clearing participants) and its purpose is to reduce the risk of one (or more) clearing firm failing to honor its trade settlement obligations. A clearing house reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (a.k.a. margin deposits), by providing independent valuation of trades and collateral, by monitoring the credit worthiness of the clearing firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting clearing firm's collateral on deposit.

Once a trade has been executed by two counterparties either on an exchange, or in the OTC markets, the trade can be handed over to a clearing house which then steps between the two original traders' clearing firms and assumes the legal counterparty risk for the trade. This process of transferring the trade title to the clearing house is called novation. It can take fractions of seconds in highly liquid futures markets; or days, or even weeks in some OTC markets.

As the clearing house concentrates the risk of settlement failures into itself and is able to isolate the effects of a failure of a market participant, it also needs to be properly managed and well-capitalized[1] in order to ensure its survival in the event of a significant adverse event, such as a large clearing firm defaulting or a market crash.

Many clearing house guarantee funds are capitalized with collateral from its clearing firms. In the event of a settlement failure, the clearing firm may be declared to be in default and clearing house default procedures may be utilized, which may include the orderly liquidation of the defaulting firm's positions and collateral. In the event of a significant clearing firm failure, the clearing house may draw on its guarantee fund in order to settle trades on behalf of the failed clearing firm.

The term is also used for banks like Suffolk Bank that acted as a restraint on the over-issuance of private bank notes.[2]

Contents

Clearing on options exchanges

The Options Clearing Corporation is an example of a clearing house that functions for the purpose of clearing equity options and bond derivatives, in order to ensure the proper implementation of these instruments.

Clearing on futures exchanges

Now a combination of the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange, CME Group owns and operates its own clearing operation while also offering clearing services (for a fee) to other exchanges. Its ClearPort operation also provides clearing for certain over-the-counter trades.

LCH.Clearnet (formerly known as The London Clearing House), for example, serves major international exchanges and platforms, as well as a range of OTC markets. It clears a broad range of asset classes including: securities, exchange traded derivatives, energy, freight, interbank interest rate swaps and euro and sterling denominated bonds and repos; and works closely with market participants and exchanges to identify and develop clearing services for new asset classes.

In 2008, Intercontinental Exchange established its own Clearing House to clear ICE Europe products and migrated clearing functions from LCH.Clearnet.

Clearing of payments

In the United States, NACHA-The Electronic Payments Association, formerly the National Automated Clearing House Association, organizes the mechanism for the financial service institutions that participate in the Automated Clearing House (ACH) network. These organizations use the ACH to transfer funds either as debits or credits between participating institutions. Most, but not all, U.S. banks are members of the NACHA. Typical uses of ACH transactions are for automatic payroll programs, monthly mortgage or membership payments, or among non-profit organizations, as a monthly donor/contribution program.

Clearing of securities

In the United States, U.S. securities clearing is done by The Depository Trust Company or Fedwire.

In Europe, securities clearing is offered by a variety of Central Counterparties, including EMCF, LCH.Clearnet, SIX x-clear and EuroCCP.

Clearing of derivatives

In the wake of the financial crisis of 2007-2010 and as part of the Obama financial regulatory reform plan of 2009, pressure has been placed on traders of derivatives such as credit default swaps to make their trades on an open exchange with a clearinghouse. In June 2009, Federal Reserve official Alfred Kohn mentioned that the largest credit default swap dealers were working on an exchange, and that only regulatory approval rather than legislation would be required.[3] In March 2010, the Options Clearing Corporation stated that it was moving forward in backing equity derivatives.[4]

See also

Notes

  1. ^ Primer: Derivative Instruments. Financial Policy Forum Derivatives Study Center.
  2. ^ Rolnick, Arthur J., Bruce D. Smith, and Warren E. Weber. "The Suffolk Bank and the Panic of 1837" Federal Reserve Bank of Minneapolis Quarterly Review. Vol. 24, No. 2, Spring 2000, pp. 3–13 [1]
  3. ^ Reuters. Kohn: OTC clearinghouse could concentrate risk.
  4. ^ Retuers. OCC says pushing ahead on over-the-counter plan.

External links


Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Clearing house — may refer to: Clearing house (finance) Clearinghouse (GIS) Clearing House (EU), an EU intelligence body Clearing House, California Railway Clearing House A computer reservations system for an airline Publishers Clearing House Biosafety Clearing… …   Wikipedia

  • Clearing House Association, LLC — The Clearing House Association, LLC is the nation’s oldest banking association representing 17 of the world s largest commercial banks, which collectively employ over 2 million people and hold more than half of all U.S. deposits. It is a… …   Wikipedia

  • clearing house — An adjunct to a futures exchange through which transactions executed on its floor where trades are settled by a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and… …   Financial and business terms

  • London Clearing House — ( LCH) A Recognised Clearing House ( RCH) under the FSA, and is responsible for the clearing and settlement of derivative transactions effected on LIFFE, LME and IPE, and also securities transactions on Tradepoint Stock Exchange. Dresdner… …   Financial and business terms

  • Automated Clearing House — (ACH) est le nom du système sécurisé de transfert des paiements qui connecte entre elles toutes les institutions financières américaines. L ACH opère en tant que système centralisé de chambre de compensation pour tous les transferts des fonds… …   Wikipédia en Français

  • Clearing (finance) — In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying… …   Wikipedia

  • clearing agent — ˈclearing ˌagent noun [countable] FINANCE another name for a clearing house * * * clearing agent UK US noun [C] ► COMMERCE a person or company that is used for getting goods officially from one country to another: »Our clearing agents will deal… …   Financial and business terms

  • house — firms that conduct business as broker dealers in securities or in the investment banking ( investment bank) field are characterized as houses. Bloomberg Financial Dictionary 1 A designation that refers to proprietary, non segregated clearing… …   Financial and business terms

  • Clearing — Compensation La compensation (clearing en anglais) est un mécanisme permettant à des banques et des institutions financières, membres de la chambre de compensation, de régler les montants dus et de recevoir les actifs correspondants aux… …   Wikipédia en Français

  • Derivative (finance) — Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond …   Wikipedia


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.