What Is the Main Function of a Centralized Clearing House in the Derivatives Market?
The main function of a centralized clearing house is to act as a counterparty to every trade, guaranteeing the performance of the contract for both the buyer and the seller. By standing between the two parties, the clearing house significantly reduces counterparty risk.
It also standardizes contracts, manages margin requirements, and facilitates the settlement process, thereby promoting market integrity and efficiency.
Glossar
Centralized Clearing
Settlement ⎊ Centralized clearing, within cryptocurrency derivatives and options trading, establishes a single counterparty to guarantee trade execution, mitigating bilateral credit risk inherent in direct over-the-counter (OTC) agreements.
Centralized Clearing House
Collateral ⎊ Centralized clearing houses in cryptocurrency, options, and derivatives markets function as intermediaries managing counterparty risk through the mandatory posting of collateral.
Clearing House
Role ⎊ The Clearing House acts as a central counterparty (CCP) in traditional and centralized crypto derivatives markets, interposing itself between buyers and sellers to guarantee the performance of the contract.