Clearinghouse.
In plain English
A clearinghouse becomes the buyer to every seller and the seller to every buyer, collects margin from both sides, nets offsetting positions, and keeps a default fund to cover a member that cannot pay. That substitution is called novation, and it turns a web of bilateral promises into a hub and spoke structure. Netting sharply reduces how much cash has to move, since only the difference between what a member owes and is owed changes hands. Members post initial margin up front and variation margin as prices move, so losses are collected daily rather than accumulating. Because so much risk concentrates in one place, clearinghouses are themselves supervised as critical infrastructure.
01Why it matters
This is the machinery that lets a trade you place settle reliably without you ever knowing who was on the other side or whether they were good for it.
02The math, step by step
Say a member owes $800 million on some positions and is owed $760 million on others. Netting means only $40 million actually moves. If prices move against the member by $15 million overnight, the clearinghouse collects that $15 million the next morning rather than waiting.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
An exchange matches buyers and sellers and reports prices. A clearinghouse takes over the resulting obligations and guarantees they settle. They are sometimes owned by the same parent company, but they do different jobs at different points in the trade.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice