What is a Clearing House?
Buyers, as well as sellers of derivatives on a futures exchange, commit themselves not to each other. Instead, they commit to the Clearing House. Therefore neither sellers nor buyers need to check the creditworthiness of their counterparties as the Clearing House guarantees the transactions. The transaction guarantee is secured by regulatory requirements as well as the margin requirements of market participants. Therefore the clearinghouse members must maintain accounts with the clearing house in which they keep the clearing margin.
The Clearing House members are members of the derivative exchange that meet high creditworthiness requirements. All transactions are processed through them.
There are 2 kinds of margins that the clearing members provide to the clearing house.
- Initial Margin: The initial margin is provided by the clearing members once they open a position. Its height is determined by the volatility of the contract. The margin must be maintained until the position is closed.
- Variation Margin: As long as the position is maintained the profits and losses are calculated (usually on a daily basis) and credited or debited to the margin accounts. Surpluses to the initial margin can be deducted by the investor whenever he wants.
The maintenance margin is frequently set as the minimum account balance. If the account balance falls below the required minimum coverage, a margin call occurs and the difference to the initial margin is to be filled up on the following trading day. If this does not happen, the open positions will be closed by the clearinghouse.
