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Clearing house definition
A clearing house is the institution that sits between executed trades and sees them through to settlement. It confirms trade details, calculates each side's obligations, and prepares transactions for completion.
In many markets the clearing house becomes the buyer to every seller and the seller to every buyer, a step called novation. That structure absorbs counterparty risk: the clearing house guarantees the trade even if one side defaults, backed by its margin system.
A clearing house is the entity; clearing is the process it carries out. Clearing houses operate across shares, futures, options, commodities, bonds, and derivatives, supporting settlement, margin management, and risk control over large trade volumes.
Clearing house Example
You buy one futures contract from another market participant.
Once the trade is executed, the clearing house steps between you and the seller and becomes the counterparty to both sides. Both sides post margin with it, for example USD 5,000 each.
If the seller defaults, the clearing house draws on that margin and its other risk controls to complete your side of the trade.
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