What is a Derivatives Clearing House? What do they do?
In today’s video we’re going to learn about the futures clearinghouse if you’re new to derivatives take a look at my other videos that explain what derivatives are what futures are how our futures priced and so on there’s there’s lots of them i’m creating these videos from my book that’s called trading and pricing financial derivatives and it’s available for
Sale on amazon.com or on amazon dakota uk if you are really interested in this topic it might be worth checking that out there’s a amazon link in the description below ok so let’s learn a bit about the futures clearing house to minimize counterparty risk to traders trades executed on a regulated a futures exchange are guaranteed by a clearing house the clearing
House is a separate entity from the traders who are buying and selling futures and it’s also separate from the brokerages or market makers the clearing houses that are solely to enhance traders assurance against failure to pay on behalf of losing counterparties clearing houses become the counterparty to each seller and buyer in the instruments that they clear a
Clearing house stands between two member firms and its purpose is to reduce the risk of any clearing firm failing to honor its trade settlement obligations a clearing house is responsible for settling trading accounts clearing trades collecting and maintaining margin money’s regulating delivery and reporting trading data clearing houses act as third parties to
All futures and options contracts acting as a buyer to every seller and the seller to every buyer fewer transactions would take place if sellers were worried that buyers would refuse to pay them at trade settlement and vice-versa a clearing house in yours that transactions happen as planned the clearinghouse reduces the settlement risks by one netting offsetting
Transactions between multiple counterparties – requiring collateral margin deposits 3 providing independent valuation of trades and collateral and for monitoring the creditworthiness of the firm’s which clear through them the clearing house also provides a guarantee fund that can be used to cover losses that exceed a defaulting member firms collateral on deposit
A clearing fee is a charge that’s assessed by a clearinghouse for completing transactions using its own facilities transaction costs in trading futures usually include both the brokerage fee and a clearing fee they sometimes include a delivery fee as well since the actual delivery of the underlying asset in a futures contract is rare that’s not always their
Clearing fees can vary as it’s based on the type and size of the transaction an fcm or futures clearing merchant is a brokerage firm that is a member of an exchange who acts as an intermediary between an investor and a futures exchange and the clearing house they help to ensure that the trade is settled appropriately and the transaction is successful the futures
Clearing merchant is responsible for holding customer funds of the margin account clearing the futures trader and performing all back-office recording functions such as marking to market a customer’s futures account sending trade confirmations and account summaries and year-end tax forms check out my other videos on financial derivatives to learn more feel free
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Transcribed from video
What is a Derivatives Clearing House? What do they do? By Patrick Boyle
