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A clearing house is a financial institution that provides clearing and settlement services for financial transactions, which are usually executed on a futures exchange or securities exchange. A Clearing House exists primarily to reduce the risks of settlement failures. Typically, a Clearing House will provide services such as netting, central counter-party and exposure management in order to control counter-party risk. In some cases, providing that the legal framework of the country supports the concept, a clearing house may also act as a central counterparty. Under such an arrangement, the clearing house acts as the counter-party (using the concept of trade novation) for all trades and guarantees the settlement of the trades.

As the Clearing House concentrates the risk of settlement failures into itself and is able to isolate the effects of a failure of a market participant, it also needs to be properly funded in order to ensure its survival in the event of a market event. Many clearing houses are funded with collateral from its participants and hence is only able to clear trades between 2 members of the clearing house. In the event of a settlement failure, participants are typically charged with a penalty. In the event of a participant failure, the clearing house will draw on its guarantee fund (funded by participants) in order to settle trades on behalf of the failed participant.

The term is also used for banks like Suffolk Bank that acted as a restraint on the over-issuance of private bank notes.^[1]

Contents 1 Clearing on options exchanges 2 Clearing on futures exchanges 3 Clearing of payments 4 Clearing of securities 5 See also 6 Notes 7 External links

[edit] Clearing on options exchanges

The Options Clearing Corporation is an example of a clearing house that functions for the purpose of clearing equity options and bond derivatives, in order to ensure the proper implementation of these instruments.

[edit] Clearing on futures exchanges

LCH.Clearnet (Formerly known as The London Clearing House), for example, provides clearing and settlement services for the International Petroleum Exchange, London, which is affiliated with the Intercontinental Exchange, Atlanta, Georgia. The London Clearing House also acts as the clearing house for Euronext.liffe and the London Metal Exchange.

In 2001, the Commodity Futures Trading Commission registered the London Clearing House as a Derivatives Clearing Organization (DCO) in the United States, making it the first offshore DCO to be recognized under the statutory mandate of the Commodity Futures Modernization Act of 2000.

CME Group, now a combination of the Chicago Mercantile Exchange, the Chicago Board of Trade, and the New York Mercantile Exchange, owns and operates its own clearing operation while also offering clearing services (for a fee) to other exchanges. Its "ClearPort" operation also provides clearing for certain "over-the-counter" trades.

In 2008, Intercontinental Exchange established its own Clearing House to clear ICE Europe products and migrated clearing functions from LCH.Clearnet.

[edit] Clearing of payments

In the United States, NACHA-The Electronic Payments Association, formerly the National Automated Clearing House Association, organizes the mechanism for the financial service institutions that participate in the Automated Clearing House (ACH) network. These organizations use the ACH to transfer funds either as debits or credits between participating institutions. Most, but not all, U.S. banks are members of the NACHA. Typical uses of ACH transactions are for automatic payroll programs, monthly mortgage or membership payments, or among non-profit organizations, as a monthly donor/contribution program.

[edit] Clearing of securities

In the United States, U.S. securities clearing is done by The Depository Trust Company or Fedwire. International clearing is most commonly done by LCH.Clearnet.

[edit] See also

• Clearing House Interbank Payments System (CHIPS)

[edit] Notes

[edit] External links

• LCH.Clearnet
• Depository Trust Clearing Corporation
• Argentina Clearing

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