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How Does a Clearing House Mitigate Counterparty Risk in Futures Trading?

The clearing house becomes the central counterparty, guaranteeing the trade and absorbing default risk from either the buyer or seller.
Greeks.Live03.11.25

How Does a Clearing House Mitigate Counterparty Risk in Futures Trading?

A clearing house acts as the central counterparty for every trade. It interposes itself, becoming the buyer to every seller and the seller to every buyer.

This guarantee ensures that if one party defaults, the clearing house absorbs the loss and ensures the other party is paid. This structure effectively eliminates the bilateral counterparty risk inherent in OTC forward contracts.

It is essential for the integrity of the futures market.

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