A clearing house is a third party that acts as a go-between for buyers and sellers in financial markets. They facilitate the exchange of payments involving securities or derivatives transactions. Clearing houses are also responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data.
The purpose of a clearing house is to reduce the risk in the buying and selling of financial instruments by making sure each party in the purchase or sale can hold up their end of the deal. That means it assures those involved in the transaction that the seller has the agreed upon the number of securities, or commodities promised, and the buyer has the agreed upon the amount of funds.
All major stock markets, including the Toronto Stock Exchange (TSX) and New York Stock Exchange (NYSE) use clearing houses for their transactions. This ensures a stock trader has enough money in their account to fund the trades they are making.
Clearing houses are also prominently used in derivatives trading, in transactions like futures contracts and options and in commodities markets.