A Clearing House plays the role of a liaison in any transaction between market participants – buyers and sellers. In all futures transactions, sellers/their brokers and buyers/their brokers are unknown to one another. Consequently, sellers are apprehensive that buyers will default in effecting payment and buyers are nervous that sellers will not deliver the goods.
Role of the Clearing House
- Once contractual terms have been agreed upon, the member brokers report the trade to the Clearing House which assumes responsibility for performance of the transaction;
- It acts as an independent third party for ensuring that buyers pay the contracted price and sellers deliver the contracted instruments;
- It notifies margins and all member brokers are required to maintain such margins. The margins vary but are usually adequate to cover the net balance owed by the member broker;
- All member brokers represent both buyers and sellers in the market and, therefore, their net position at day end is assessed for determining their margin requirement;
- In the event of failure to perform any transaction, the margin would be utilized
Conclusion
Thus, Clearing Houses assess, collect and maintain margins, regulate trades, ensure contract performance and report data.
