What Is the Primary Function of a Clearing House in the Financial Derivatives Market?

The primary function of a clearing house in the financial derivatives market is to ensure the integrity and stability of the market by managing counterparty risk. It achieves this by acting as the central counterparty (CCP) to every trade.

By interposing itself between the buyer and seller, the clearing house guarantees the performance of the contract, even if one of the original parties defaults. It also standardizes the clearing process and collects margin to cover potential losses.