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 (also called "
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. Also, it acts as a clearing firm.