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Why is there a need for a clearing house?

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Why is there a need for a clearing house?
posted Jul 4, 2017 by Diya Borda

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A clearing house takes the opposite position of each side of a trade. When two investors agree to the terms of a financial transaction, such as the purchase or sale of a security, a clearing house acts as the middle man on behalf of both parties. The purpose of a clearing house, therefore, is to improve the efficiency of the markets and add stability to the financial system.
The futures market is most commonly associated with a clearing house, since its financial products are complicated and require a stable intermediary. Each futures exchange has its own clearing house. 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 sum of money - based on clearinghouse margin requirements - sufficient to cover the member's debit balance.

answer Jul 4, 2017 by Debolina Charaborthy
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