Clearing House

Payments Hub

What is a Clearing House?

A clearing house is a financial institution that acts as an intermediary between buyers and sellers of financial instruments to settle trades and ensure that both parties fulfil their obligations.

In the financial industry, there are many types of clearing houses that serve a variety of markets and instruments, and they can either be owned by market participants or be independent entities regulated by financial authorities.

Since they can help reduce systemic risk by providing a centralised and standardised mechanism for settling trades, they are most commonly associated with the derivatives market, where trades can involve complex financial instruments and high levels of risk. 

But there are many different types of clearing houses, each with its own specific function and application. Some will specialise in trades of stocks and other equity instruments, while others focus on trades in fixed-income instruments, such as bonds and other debt securities.

Commodity clearing houses, for example, handle trades in commodities, such as agricultural products, energy products, and metals, while foreign exchange clearing houses take on trades in foreign currencies.

There are also multi-asset class clearing houses that can handle trades across different markets and asset classes.

In addition to facilitating settlement, clearing houses may provide other services, such as trade matching, netting, and margining.

How does a Clearing House work?

A clearing house acts as an intermediary between buyers and sellers of financial instruments and facilitates the settlement of trades by ensuring that both parties adhere to their agreed-upon contract terms.

When a trade is executed, the clearing house becomes the counterparty to both the buyer and the seller. This process – known as novation – allows the clearing house to assume the risk that one party may fail to fulfil their obligations under the contract. 

The clearing house reduces this risk of default by requiring both parties to deposit collateral which the clearing house can use to cover the loss if one party fails to fulfil their obligation.

Here’s a simplified overview of how a clearing house works:

  • Trade Execution: A buyer and seller enter into a trade and submit their respective orders to their broker.
  • Trade Confirmation: The broker sends the trade details to the clearing house, which confirms the trade details with both parties.
  • Collateral Requirements: The clearing house requires both the buyer and the seller to deposit collateral, such as cash or securities, with the clearing house to cover potential losses in the event of default.
  • Novation: The clearing house becomes the buyer to the seller and the seller to the buyer, becoming the counterparty to both parties. This process is known as novation.
  • Netting: The clearing house nets the obligations of all parties to the trade, which can reduce the amount of collateral required.
  • Settlement: The clearing house ensures that both parties fulfil their obligations to deliver the financial instrument or make the payment by settling the trade.
  • Default Management: If one party fails to fulfil their obligation, the clearing house uses the collateral deposited by both parties to cover the loss. If the loss exceeds the amount of collateral deposited, the clearing house may use other resources (such as a default fund or insurance) to cover the loss.

By acting as a central counterparty, the clearing house helps to reduce counterparty risk and promote market stability; however, it cannot eliminate the risks of a transaction entirely. 

Any firm looking to leverage the services of a clearing house needs to carefully weigh the associated risks and benefits to fully understand what they are getting into.


Clearing Houses Work Diagram

How clearing houses work


The Risks and Benefits of Clearing Houses

While clearing houses operate largely as a means of reducing the credit, counterparty, and settlement risks involved in a transaction, that does not mean that risks can be ignored when using one.

Clearing houses have the potential to become a single point of failure for the financial system, creating a degree of concentration risk that is compounded by the fact that they are complex institutions vulnerable to operational risk, such as system failures or cyber-attacks.

They must also be well governed to ensure they operate effectively and efficiently, particularly given the complex legal and regulatory environment they operate in, which itself creates certain legal risks.

Furthermore, clearinghouses can also create liquidity risk since they require participants to post collateral that must be made inaccessible for some period of time.

On the flip side, requiring participants to post collateral certainly helps to promote financial stability, reduce credit risk, and inject confidence into a transaction.

Clearing houses also provide standardised processes, procedures, and contracts in a transparent manner which can help to reduce complexity, promote efficiency in financial markets, and improve market integrity.

On aggregate, the benefits of clearing houses in promoting financial stability and reducing risk generally outweigh the risks, but it is important to be aware of the potential risks to manage them effectively.

Examples of Clearing Houses

Many clearing houses are operating in various financial markets around the world. 

The Depository Trust & Clearing Corporation (DTCC) is a USA-based clearing house that provides clearing and settlement services for a range of financial instruments, including equities, bonds, and derivatives. 

In Europe, Euroclear and Clearstream provide many of these same clearing and settlement services for the EU, while the Hong Kong Exchanges and Clearing Limited (HKEX) serves that function in the Asian markets.

LCH.Clearnet out of the UK is one of the largest clearing houses in the world. It provides clearing and settlement services for various financial instruments, including interest rate swaps, credit default swaps, and commodities.

CME Group, another USA-based clearing house, is one of the largest futures exchanges in the world and provides clearing and settlement services for futures and options contracts on commodities, currencies, and interest rates.

Hong Kong Skyline

How to access Clearing House services

Access to clearing house services typically requires membership in the clearing house, and the requirements for membership can vary significantly depending on the clearing house and the type of financial instrument being cleared.

Typically, however, becoming a member of a clearing house requires a financial institution to meet certain criteria, such as having sufficient financial resources, demonstrating operational capabilities, and meeting certain regulatory requirements. 

The process can be complex and time-consuming and may involve a detailed application process, due diligence checks, and ongoing compliance requirements.

Access to these services is generally limited to regulated financial institutions, such as banks, brokers, and other financial intermediaries approved for membership in the clearing house. However, some clearing houses may also offer services to non-financial firms or individuals, depending on the nature of the financial instrument being cleared and settled.

Once a financial institution is a member of a clearing house, it can access the clearing house’s services for clearing and settling financial transactions. 

This may involve submitting trades to the clearing house for clearance and settlement, posting collateral to meet margin requirements, and complying with other operational and regulatory requirements.

Clearing House Regulations and oversight

Regulatory oversight of clearing houses typically involves regular monitoring and assessment of the clearing house’s financial resources, risk management procedures, and operational capabilities. Authorities may also conduct stress tests and other assessments to evaluate its ability to withstand market disruptions.

These regulations and oversight are designed to ensure that clearing houses operate safely and have adequate resources and risk management procedures to protect the financial system if something were to go wrong.

Like all internationally operating organisations, clearing houses are subject to regulations and oversight by regulatory bodies both in their home jurisdictions and in the jurisdictions where they operate. 

In the United States, clearing houses are overseen by the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), depending on the type of financial instrument being cleared. The CFTC is responsible for clearing houses that clear futures and options contracts, while the SEC looks at clearing houses that clear securities.

In Europe, the European Securities and Markets Authority (ESMA) shares this role with the various national regulatory authorities, such as the Financial Conduct Authority (FCA) in the UK and the Autorité des Marchés Financiers (AMF) in France.

EU flag

In Asia, the regulation tends to be more regional, with clearing houses overseen by different regulatory bodies depending on the jurisdiction. For example, in Hong Kong, they are regulated by the Hong Kong Monetary Authority (HKMA), while in Singapore, it is the Monetary Authority of Singapore (MAS).

Regardless of the nuances, these systems are all designed to promote the safety and stability of the financial system by ensuring that clearing houses are adequately capitalised, have robust risk management procedures, and can manage potential losses and market disruptions.


Latest News


2023 McKinsey Global Payments Report highlights robust growth and future prospects in global payments industry


A recent report by McKinsey & Company on the global payments industry reveals significant growth and optimistic future prospects. The… Read More →


CBI expands Name Check coverage across Europe through Swift’s Pre Validation service


London – 20th September 2023 – CBI is an Italian company that develops digital services – including open banking and… Read More →


Visa and Swift announce collaboration to increase transparency, speed and security in global B2B payments


Visa and Swift today announced a collaboration to streamline international business-to-business (B2B) payments by strengthening connectivity between their networks that… Read More →


ACI Worldwide Collaborates with Microsoft to Accelerate Global Move to Real-Time Payments


ACI Real-Time Payments Cloud Platform, Hosted in Microsoft Azure, Helps Financial Institutions Enable Instant Payments Transactions Faster MIAMI, FL —… Read More →


Is regional interoperability important for open banking?


Interoperability in open banking and open finance has many different facets and can mean many different things…. Read More →


Citi unveils new digital asset capabilities for institutional clients


At Sibos, Citi Treasury and Trade Solutions (TTS) has unveiled the initiation and testing stage of Citi Token Services, an… Read More →


Trade Finance Global Announces TFG Trade, Treasury and Payment Awards 2023 Winners


London/Toronto – September 17, 2023 – Trade Finance Global (TFG) is thrilled to announce the winners of the prestigious 2023… Read More →


Africa’s payment revolution takes centre stage at Sibos 2023


Over the past year, Africa has made notable strides in digitizing its payments landscape, culminating in South Africa’s recent entry… Read More →


ISO 20022: A game changer for Canadian corporations


The success and efficiency of Canadian corporations is integral to the well-being of our economy. … Read More →


The time is now to unlock the future of cross-border payments


Cross-border payments can play a special role for people and businesses around the world. They allow us to send money… Read More →


The power of allies: navigating LGBTQ+ inclusion in trade, treasury, and payments


A first for the industry, Trade Finance Global (TFG) has partnered with several major organisations in the trade, treasury, and… Read More →


Q&A: Visa’s Veronica Fernandez on moving from traditional to seamless consumer experiences with embedded finance


To learn about this hidden, but vital aspect of finance, Trade Finance Global’s Brian Canup (BC) spoke to Veronica Fernandez… Read More →


PODCAST | How to prepare for Sibos 2023 – Updates from Swift


In this episode of Trade Finance Talks, TFG’s Deepesh Patel was joined by Shirish Wadivkar, Global Head – Wholesale Payments… Read More →


Navigating the future of digital payments: Efficiency, security, and compliance


In an era marked by technological advancement and rapid digitisation, the landscape of financial transactions has undergone a transformative shift…. Read More →


New Guide to Payment Regulations unveiled for Asian markets


A new Guide to Payment Regulations has been released, offering insights into the regulatory frameworks and licensing schemes for payments… Read More →

About the Author

Carter is a Research Associate at Trade Finance Global focusing on the impact of macroeconomic trends and emerging technologies on international trade.

He holds international business and science degrees from the European Business School in Germany as well as Brock University and Queen’s University in Canada where he served as the director of operations and finance for the student executive council and as an operations associate for the Queen’s University Alternative Asset Fund. Carter’s work has been featured in publications and articles supported by the SME Finance Forum, managed by the International Finance Corporation, World Trade Organization, and International Chamber of Commerce.

Carter is a graduate of the Trade Accelerator Program (TAP) through the Toronto Board of Trade and the head of international business development at the Canadian-based building supply exporting firm, The Great Egress Co. He is also a Certified International Trade Professional (CITP) and a member of the exam development panel for the Forum for International Trade Training (FITT) where he developed exam questions for the update of the CITP Professional Exam as part of FITT’s application for ISO 17024 Accreditation.

Back to Top