Glossary · Funds and derivatives
Clearing house
A clearing house steps into the middle of every trade, becoming the buyer to each seller and the seller to each buyer, so a trade is completed even if one side fails.
Also called: clearinghouse, central counterparty, CCP, clearing
In plain words
When you buy a share or a futures contract, the trade is not finished until the money and the security change hands. If the other side went bust in between, you could be left with nothing. A clearing house removes that worry: it stands between every buyer and seller and guarantees that each trade is completed.
To be able to keep that promise, it collects margin, a deposit from both sides, and for futures it settles gains and losses every day. Its members, big banks and brokers, also pay into a shared default fund.
It also nets trades. A broker that bought 1,000 shares of a company and sold 800 during the day only has to receive 200 at the end, instead of settling 1,800 shares in separate deals.
Example
When a member fails
Firm A bought oil futures from firm B. Oil rises $10 on 1,000 barrels, so B owes A $10,000, and then B goes bankrupt.
- Without a clearing house, A would join the line of B’s creditors and might get a fraction of its $10,000, years later.
- With one, A’s contract is with the clearing house, which pays A the $10,000 as usual.
- The clearing house covers it from B’s margin first, then from B’s share of the default fund, then from its own money, and only then from the other members’ default fund.
- It then sells off B’s open positions, so the risk does not keep growing.
A failure stays inside a ring of protections instead of spreading from firm to firm.
One level deeper
Every major market has one. In the US, stock trades are cleared by the National Securities Clearing Corporation (part of DTCC) and settle one business day after the trade (T+1) since May 2024; options by the Options Clearing Corporation; futures by the exchanges’ own clearing houses, such as CME Clearing. In Europe big ones include LCH and Eurex Clearing.
After the 2008 crisis, when it was unclear who owed what to the failed Lehman Brothers through private derivatives, the G20 countries agreed that standard over-the-counter derivatives such as interest-rate swaps should go through clearing houses too.
That made clearing houses some of the most important institutions in finance: they concentrate risk in one place. They are tightly regulated, they raise margins when markets get wild (which can itself force investors to sell), and their own failure would be a disaster.
Why it matters
They let firms trade with strangers without checking each one’s finances, which makes markets bigger and cheaper.
They limit how far a single failure can spread, the main lesson of 2008.
Their margin calls in a panic pull cash out of markets just when it is scarce.
A common mistake
Myth: A clearing house makes trading risk-free.
In fact: It moves the risk from many private links to one central hub with strong defenses. If several big members failed at once, even those defenses could be tested, which is why regulators stress-test clearing houses.
Questions people ask
What is the difference between clearing and settlement?
Clearing is working out and guaranteeing who owes what to whom after a trade, including netting; settlement is the actual exchange of money and securities, which in US stocks happens one business day after the trade.
Who owns clearing houses?
Usually exchange groups or the banks and brokers that use them. DTCC, for example, is owned by its members; CME Clearing is part of CME Group.
Why do clearing houses ask for margin?
So they have money on hand if a member cannot pay. Both sides of a trade post margin, and futures margins are topped up every day as prices move.
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About the numbers
- This page explains a term. It is not investment advice.