Clearing House
Clearing House
A clearing house is a crucial component of financial markets, especially in the context of derivatives trading, including crypto futures. It acts as an intermediary between buyers and sellers, mitigating counterparty risk and ensuring the smooth functioning of the market. This article will provide a comprehensive, beginner-friendly overview of clearing houses, their functions, and their importance in the world of financial transactions.
What is a Clearing House?
Essentially, a clearing house sits between two parties in a transaction. Instead of Buyer A directly trading with Seller B, both parties trade *with* the clearing house. The clearing house then becomes the buyer to every seller and the seller to every buyer. This process is called novation. This seemingly simple step has profound implications for market stability.
Think of it as a trusted third party ensuring everyone honors their commitments. Without a clearing house, each participant would need to assess the creditworthiness of *every other* participant, creating a web of bilateral agreements and significantly increasing risk.
== Functions of a Clearing
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