Clearinghouse
A clearinghouse is a financial intermediary that interposes itself between the buyer and seller of a financial contract, becoming the buyer to every seller and the seller to every buyer, thereby eliminating bilateral counterparty risk and ensuring contract performance through margin requirements and default management procedures.
Clearinghouses are one of the most important and least visible components of financial market infrastructure. Their core function — novation — means that when two parties execute a trade, the clearinghouse steps in and becomes the counterparty to each side. Party A no longer faces Party B; both face the clearinghouse. This transformation converts a web of bilateral exposures into a hub-and-spoke structure where the clearinghouse sits at the center.
In the United States, the major clearinghouses are the Depository Trust & Clearing Corporation (DTCC), which operates through subsidiaries including the National Securities Clearing Corporation (NSCC) for equities and the Fixed Income Clearing Corporation (FICC) for government bonds and mortgage-backed securities; the Options Clearing Corporation (OCC), which clears listed options on US equity options exchanges; and CME Clearing, part of CME Group, which clears futures and OTC derivatives traded on CME venues.
Clearinghouses protect themselves and market participants through a layered risk management structure. First, they require that all clearing members (typically broker-dealers and prime brokers) post initial margin — collateral held against potential future losses. Second, variation margin is collected and paid daily (sometimes intraday) to reflect the current mark-to-market gains and losses on open positions, preventing the accumulation of large uncollateralized exposures. Third, clearinghouses maintain a mutualized default fund contributed by all members, which can be drawn upon if a defaulting member's margin is insufficient to cover its losses.
The 2008 financial crisis exposed the fragility of bilateral OTC derivatives markets and accelerated the push toward central clearing. The Dodd-Frank Act and its European equivalent (EMIR) mandated that standardized derivatives be cleared through regulated clearinghouses. This concentrated systemic risk in the clearinghouses themselves, making their resilience and governance critically important — regulators designate major clearinghouses as systemically important financial market utilities (SIFMUs) subject to special oversight.