Markets · 6 pages · 12 min

How a clearinghouse stands in the middle

A clearinghouse becomes the buyer to every seller and the seller to every buyer after a trade.

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From the opening

A clearinghouse steps into a matched trade and becomes the buyer to every seller and the seller to every buyer. That novation puts it in the middle, so each side's contract is with the clearinghouse rather than with the stranger who took the original other side. The opening covers novation inserts the clearinghouse, each side faces the middle, and margin shrinks the default hole.

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Inside

Novation inserts the clearinghouse
Each side faces the middle
Margin shrinks the default hole
A waterfall funds the break
Where the idea stops applying
A distinction worth keeping

Sources

Central counterparty novation
Clearinghouse default waterfall

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How a clearinghouse stands in the middle

From the opening

Inside

Sources

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