Clearing house definition
A clearing house is an organization, institution or third party that settles a financial obligation between a buyer and seller. It’s the job of a clearing house to ensure that all parties in a financial transaction honor the agreements that they’ve committed to and settle them as such.
Clearing houses ensure that transactions run efficiently. The buyer receives what they paid for, and the seller receives the amount of money agreed on for the sale.
The idea of a clearing house has been around for centuries. Various forms existed in Japan, Italy and France before the first modern-day clearing house as we know them was established in London in 1773.
They make up an integral part of financial ecosystems and play a vital role in instilling financial stability.
What is the role of a clearing house?
The role of the clearing house is to act as the independent third party, or middleman, between a buyer and a seller in a financial transaction. It’s the job of the clearing house to ensure all the necessary steps are undertaken by both buyer and seller for the transaction to be settled.
Clearing houses are particularly important on futures markets because these take time to be filled. The clearing house must ensure that the contract is settled at the time originally agreed by both parties, at the price agreed.
Although clearing houses act for their own financial gain, profiting from clearing and transaction fees, they’re a pivotal part of the financial ecosystem. They maintain fairness by upholding any contract or agreement of sale between a buyer and a seller. More significantly they maintain the industry’s integrity and instill confidence for those who may be worried about the opposing party upholding their part of the financial obligation.