Resolved: So what is a clearinghouse?
From the video it seems that clearinghouse is somewhat like a broker and a stock exchange. So what is it exactly or what is the difference with those two?
Hello Ruslan!
Thanks for reaching out!
A clearinghouse is a financial institution that acts as an intermediary between buyers and sellers of financial instruments, such as stocks, bonds, and derivatives. Its primary role is to facilitate the settlement of transactions by ensuring that all parties involved fulfill their obligations. This is done by providing a central counterparty that assumes the counterparty risk of each transaction. In other words, the clearinghouse acts as a guarantor of the trade, reducing the risk of default and increasing market efficiency.
While there are some similarities between clearinghouses, brokers, and stock exchanges, they each perform distinct functions in the financial ecosystem. A broker executes trades on behalf of their clients, earning a commission for their services. A stock exchange provides a platform for buyers and sellers to transact with each other, typically through an electronic order book.
In contrast, a clearinghouse provides post-trade services to ensure the settlement of transactions. It may work in conjunction with brokers and exchanges, but it is not involved in the execution of trades or the matching of buyers and sellers. Instead, it acts as a critical infrastructure to ensure the smooth functioning of financial markets by reducing counterparty risk and promoting market efficiency.
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The 365 Team