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Central Clearing Houses

Overview

A clearing house is an intermediary between buyers and sellers of financial instruments. It is an agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.

A clearing house takes the opposite position of each side of a trade. When two investors agree to the terms of a financial transaction, such as the purchase or sale of a security, a clearing house acts as the middle man on behalf of both parties. The purpose of a clearing house is to improve the efficiency of the markets and add stability to the financial system.

The futures market is most commonly associated with a clearing house, since its financial products can be complicated and require a stable intermediary. Each futures exchange has its own clearing house. All members of an exchange are required to clear their trades through the clearing house at the end of each trading session and to deposit with the clearing house a sum of money sufficient to cover the member's debit balance.

There are two major clearing houses in the United States: The New York Stock Exchange (NYSE) and the NASDAQ. The NYSE, for example, facilitates the trading of stocks, bonds, mutual funds, exchange-traded funds (ETFs) and derivatives. It acts as the middle man in an auction market that allows brokers and other investors to buy and sell securities to people by matching the highest bidding price to the lowest selling price. Unlike the NASDAQ, the NYSE has a physical trading floor.

National Securities Clearing Corporation (NSCC), which is a subsidiary of the Depositary Trust Clearing Corporation (DTCC), was established in in 1976 and provides clearing, settlement, risk management, central counterparty services and a guarantee of completion for certain transactions for virtually all broker-to-broker trades involving equities, corporate and municipal debt, American depositary receipts, exchange-traded funds, and unit investment trusts. NSCC also nets trades and payments among its participants, reducing the value of payments that need to be exchanged by an average of 98% each day. NSCC is regulated by the U.S. Securities and Exchange Commission (SEC).

Options Clearing Corporation (OCC) is a U.S. clearing house based in Chicago. It specializes in equity derivatives clearing providing central counterparty (CCP) clearing and settlement services to 15 exchanges. Instruments include options, financial and commodity futures, security futures and securities lending transactions.  Like all clearing houses, the OCC acts as guarantor between clearing parties ensuring that the obligations of the contracts they clear are fulfilled. It currently holds approximately $100 billion of collateral deposited by clearing members and moves billions of dollars a day. In 2016 cleared contract volume totaled 4.17 billion making it the fifth highest annual total in OCC's history.

 

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