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It is an organisation that works with commodity exchanges to handle confirmation, delivery and settlement of a traded produce. An agency or separate corporation of a futures exchange is responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data.
Clearing houses act as third parties to all futures and options contracts – as a buyer to every clearing member seller and a seller to every clearing member buyer.
Clearing houses either focus on a type of produce or on a specific country or region, or sometimes both. The 1990s saw a trend of merger in exchanges leading to a number of clearing houses associated with those exchanges also merging and consolidating. This led to a number of clearing houses that cover multiple countries and all three major types of securities, bonds, stocks and derivatives.
Each futures exchange has its own clearing house. In the US, the merger of the Chicago Mercantile Exchange, the Chicago Board of Trade and the New York Mercantile Exchange into the CME Group saw it set up its own clearing operation ClearPort. In Europe, LCH.Clearnet serves major international exchanges and platforms, as well as a range of OTC markets. In 2008, Intercontinental Exchange established its own clearing house to clear ICE Europe products.
All members of an exchange are required to clear their trades through the clearing house at the end of each trading session and to deposit with the clearing house a particular sum based on margin requirements.
For instance, if a member broker reports to the clearing house a total purchase of 100,000 bushels of May wheat and total sales of 50,000 bushels of May wheat, he would be net long 50,000 bushels of May wheat. Assuming that this is the broker's only position in futures and that the clearing house margin is six cents/bushel, the broker would be required to have $3,000 on deposit with the clearing house.
Similar arrangement exists in India with the clearing houses attached to NCDEX, MCX, NMCE and ACE exchanges.
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