Clearing house

derivatives

The clearinghouse is an association or institution whose mission is to guarantee and watch over credit institutions, investors and other financial agents, in order that they can make their payments and can clear and settle among themselves.

The clearing houses' main mission is to avoid the risk of non-compliance of the counterpart in a financial transaction and that risk in which it is not possible to meet the financial commitments acquired.

For example, it guarantees transactions in futures and options, ensuring anonymity between the parties. In the futures market, there are different clearing houses that represent transactions in different countries, such as BME Clearing, Eurex Clearing, CME Clearing Europe, ICE Clearing or Euro CCP, among others.

The compensation method is reduced to a single balance, where the global of all the transactions carried out between different parties is summarized, accumulating all the operations by net amount between the financial entities. They are settled through accounts that, in the case of any country, are opened at the Central Bank of that country.

Clearing houses are also known as clearing houses, and their main characteristic is that they do not position themselves in the market. Its position is net between the buyers and sellers involved in it.

Advantages and disadvantages of clearing houses

The advantages that we can highlight about their existence is that they reduce the market counterparty risk. Furthermore, at the regulatory level, they allow the trading volume of derivatives to be accounted for more efficiently and allow controlling the issuance of uncovered derivatives, such as Credit Default Swaps or CDS. In this way, it is easier to apply taxes on the transactions carried out with them.

The drawbacks are related to the increase in the guarantees required to operate. Since the objective is to ensure security in transactions, affecting market liquidity and limiting access. This consequence leads investors to opt for OTC (Over the Counter) financial products. Products in which the warranties are lower and access is easier. However, the control of these types of unregulated markets becomes more difficult for regulators.

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