Clearing

Definition

The term clearing refers to the process by which a clearing house becomes a buyer or a seller of a futures contract. Clearing houses maintain the integrity of the market by guaranteeing performance of a contract.

Explanation

The role of a clearing house is to maintain the integrity of the futures market or exchange. One of the ways to achieve this goal is by guaranteeing the performance of a contract. The process of clearing accomplishes this objective in the following manner: the clearing house becomes the buyer whenever a trader sells a futures contract, and the clearing house becomes the seller whenever a trader wishes to buy a contract. The term typically applies to options and futures contracts.

By taking on these intermediary roles, the clearing house assumes the risk of non-performance. The clearing house also assumes responsibility for ensuring deliveries take place, settling accounts, recordkeeping, as well as maintenance of margin accounts. In exchange for performing all of these services, the trader is charged a clearing fee.

Related Terms

clearing houseclearing firmclearing fee