How Does a Clearing House Guarantee Futures Contract Performance?
A clearing house acts as the counterparty to every trade, becoming the buyer to every seller and the seller to every buyer. This process, called novation, guarantees the contract's performance even if one party defaults.
It manages risk through margin requirements, marking-to-market, and a guarantee fund, ensuring that the integrity of the financial system is maintained.
Glossar
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.
Clearing House Failure
Failure ⎊ A clearing house failure represents the inability of a central counterparty (CCP) to fulfill its financial obligations to clearing members.
Clearing House Guarantee
Function ⎊ Clearing house guarantee refers to the assurance provided by a clearing house that derivative contracts will be honored, even if one party defaults.
Guarantee
Assurance ⎊ Within cryptocurrency derivatives and options trading, assurance represents a formalized commitment regarding the performance or outcome of a contract, extending beyond a mere promise.
Performance
Evaluation ⎊ Performance, within cryptocurrency, options, and derivatives, represents a quantified assessment of strategy efficacy, typically measured by metrics like Sharpe ratio, Sortino ratio, or maximum drawdown, adjusted for risk-adjusted returns over a defined period.