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The futures markets · lesson 3 of 20

The clearing house

After every trade the clearing house steps in between buyer and seller. It becomes the buyer to every seller and the seller to every buyer.

In this way neither of the two has to worry about the soundness of the other. The risk that one party does not pay is taken on and managed by the clearing house.

To protect itself the clearing house asks everyone to post a security deposit and recalculates gains and losses every day. These are the two mechanisms that make a market among strangers possible.

Questions

1. What does the clearing house do?

It steps in between buyer and seller

It becomes the counterparty of both.

2. Which risk does it remove for the two parties?

The risk that the other party fails to perform

Counterparty risk passes to the clearing house.

3. How does the clearing house protect itself?

With security deposits and daily recalculation of gains and losses

Margins and daily valuation are the two safeguards.

Continue from lesson 4

The futures markets: an online course in 20 short lessons with quizzes and a final certificate, on Unicorn Academy.

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