The Role of a Clearing House

Over the counter financial products are traded directly between two counterparties, whereas financial products traded on organised markets are channeled through a central counterparty i.e. the clearing house.

The clearing house’s intervention in a given transaction is not neutral: unlike a broker or a dealer, the clearing house is not an agent, it operates as a central counterparty. If a counterparty A wishes to sell a futures contract on an organised market, and counterparty B wishes to puchases it, the clearing house interposes between the parties as a legal counterparty i.e., the clearing house becomes buyer to every seller and vice versa.

Such interposition is made possible by the legal effect of a double novation i.e. the replacement of an obligation to perform with a new obligation, or the replacement of a party to an agreement with a new party.