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A [[clearing house]] is to | A well-capitalised intermediary body that [[clearing|clears]] and settles transactions executed on [[exchange]]. The [[exchange]] is the place where you ''execute'' the trade; the [[clearing house]] is where you ''settle'' it. Most [[exchange]]s will have an associated [[clearing house]]. So [[initial margin]], DVP and all that — all that happens on the clearing house. [[Exchange]]s don’t themselves call for [[margin]]. | ||
A [[clearing house]] is designed to protect the parties to a transaction on an [[exchange]] from the counterparty [[credit risk]] they have to one other. | |||
If one of them defaults, the [[clearing house]] steps in to take over the defaulting party's obligations, and fulfils them (usually by finding another market participant to take over the contract) | If one of them defaults, the [[clearing house]] steps in to take over the defaulting party's obligations, and fulfils them (usually by finding another market participant to take over the contract) | ||
[[Clearing house]]s require [[initial margin]] from both parties (as well as [[default fund contribution|default fund contributions]] and other fun things like that) at the start of the contract which they use to manage the default. | [[Clearing house]]s require [[initial margin]] from both parties (as well as [[default fund contribution|default fund contributions]] and other fun things like that) at the start of the contract which they use to manage the default. |