Central Clearinghouse Function

A central clearinghouse acts as the intermediary between buyers and sellers in a derivatives market, guaranteeing the performance of both parties. It stands between the two sides of the trade, effectively becoming the buyer to every seller and the seller to every buyer.

This process, known as novation, eliminates the need for traders to trust each other, as they only need to trust the clearinghouse. By managing collateral, calculating daily settlements, and enforcing margin requirements, the clearinghouse ensures that the market remains liquid and stable.

In the event of a default, the clearinghouse uses its own capital and a default fund to cover the losses, preventing contagion from spreading to other market participants. It is the bedrock of safety and efficiency in financial derivatives markets.