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Clearing House

A clearing house is a financial institution that acts as an intermediary between buyers and sellers in financial markets, ensuring that trades are settled properly. The clearing house guarantees the performance of both parties in a transaction, reducing the risk of default and ensuring the accurate transfer of assets and funds. Clearing houses also calculate net positions, process margin requirements, and mitigate counterparty risk. They play a critical role in the smooth functioning of stock exchanges, futures, and options markets.

Example

The Options Clearing Corporation (OCC) serves as the clearing house for options trades in the U.S., ensuring that both the buyer and seller meet their obligations by managing margin requirements and settling trades.

Key points

• A clearing house acts as an intermediary to ensure trades are settled correctly.

• It guarantees the performance of both parties and reduces counterparty risk.

• Essential for the functioning of financial markets, including stock exchanges and derivatives markets.

Quick Answers to Curious Questions

The clearing house ensures that financial trades are settled correctly by acting as an intermediary, managing risk, and guaranteeing the performance of both parties.

It reduces counterparty risk by ensuring that both buyers and sellers fulfill their obligations, and by managing margin and net positions.

Clearing houses are vital in stock exchanges, futures, options, and derivatives markets.