clearingorganisation

A clearing organisation, often referred to as a clearing house or central counterparty (CCP), is a financial market infrastructure that interposes itself between buyers and sellers to ensure the clearing and settlement of trades. By becoming the counterparty to both sides of a trade, the clearing organisation guarantees performance and reduces bilateral credit risk, enabling more robust and liquid markets.

Key functions include trade clearing, where terms are confirmed and positions are novated to the CCP; risk management, which uses margin requirements (initial and variation margin) and a default fund to cover potential losses; and settlement and custody services, including the transfer of cash and securities and the segregation or rehypothecation of collateral. In the event of a member default, the organisation activates its default procedures, such as liquidation auctions, to protect non-defaulting participants.

Clearing organisations operate under formal regulation and supervision, with frameworks in jurisdictions around the world. This includes capital and liquidity requirements, governance standards, and stress testing. They typically serve clearing members and their clients, and may operate across multiple asset classes, such as derivatives and securities. They also interact with other market infrastructures, including central securities depositories and payment systems.

Benefits include enhanced market stability, multilateral netting to improve liquidity, and standardized risk controls. Potential drawbacks include concentration of risk within the CCP, reliance on robust margining and governance, and the need for effective crisis management to prevent systemic disruption.

Examples of well-known clearing organisations include CME Clearing, ICE Clear, Eurex Clearing, and LCH.