Clearing house (finance)

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A clearing house is a financial institution formed to facilitate the exchange (ie., "clearance") of payments among banks. In contrast, a central counterparty clearing (CCP) provides clearing services, and also takes on the settlement risk of the counterparties (member banks and broker-dealers).[1]

Description[edit]

A clearing house stands between two clearing firms (also known as member firms or participants), its purpose is to reduce the risk a member firm failing to honor its trade settlement obligations.

History[edit]

Origins and development[edit]

The origins of clearing houses dates back to the late 19th century, when they were primarily used to net payments in commodities futures markets, the Suffolk Bank opened the first clearing house in 1818 in Boston, and one was incorporated in New York in 1850.[2] A clearing house for bankers was opened in Philadelphia in 1858.[3]

The use of clearing houses by financial exchanges is somewhat more novel. Financial exchanges only first began to use clearing houses in the latter part of the 19th century, as late as 1899, the London Stock Exchange was still the only stock exchange in Europe using a clearing house.[4] The first stock exchange in the United States, the Philadelphia Stock Exchange (founded 1790), was also the trend setter that was the first U.S. stock exchange to use a clearing system. It began using a clearing system in 1870,[5] but the much larger New York Stock Exchange (NYSE) still had no clearing system some two decades later in 1891, the Consolidated Stock Exchange of New York used clearing houses from its inception in 1885. This exchange existed in competition with the NYSE from 1885-1926 and averaged 23% of NYSE volume, its competitor Consolidated's use of clearing houses, finally forced the NYSE to follow suit (from 1892) to gain the same market advantages of at least prevention of frauds and reneging on bargains.[6] Some major U.S. commodities exchanges, like the New York Coffee Exchange (today the Coffee, Sugar and Cocoa Exchange) and the Chicago Mercantile Exchange did not begin using clearing houses to settle their transactions until the second decade of the 20th century. The New York Coffee Exchange began using clearing houses in 1914,[7] the Chicago Mercantile Exchange began using them even later in 1919.[8]

Central counterparty clearing[edit]

Modern central counterparty clearing (CCP) provides clearing services, and also takes on the settlement risk of the counterparties (member banks and broker-dealers).

See also[edit]

References[edit]

  1. ^ Rehlon, Amandeep; Nixon, Dan. "Central counterparties: what are they, why do they matter and how does the Bank supervise them?" (PDF). Bank of England. Retrieved 1 April 2017. 
  2. ^ U.S. House of Representatives Banking and Currency Reform Hearings of the Subcommittee of the Committee on Banking and Currency, January 7, 1913, Part 1, Statements of A. Barton Hepburn, Victor Morawetz and Paul M. Warburg (1913) Washington, D.C.: Government Printing Office, p.388
  3. ^ Blanchard, C. (Ed.) The Progressive Men of the Commonwealth of Pennsylvania (Vol. 2) (1900) Logansport, Indiana: A.W. Bowen & Co., p. 873
  4. ^ Lloyd, H.D. (1899), "Clearing, and clearing houses", Cyclopædia of Political Science, Political Economy, and the Political History of the United States, 1, New York: Maynard, Merrill, and Co, p. 223 )
  5. ^ [1] Guarino, A.S. Philadelphia Stock Exchange, Encyclopedia of Greater Philadelphia
  6. ^ Sobel, R. (2000) The Big Board. Washington, D.C.: Beard Books, p. 131 (Original work published 1965 New York, New York: Free Press)
  7. ^ [2] Staff, Simmon’s Spice Mill, Vol. 37, No. 10, October, 1914, p. 1036
  8. ^ Labuszewski, J.W., Nyhoff, J.E., Co R., and Peterson, P.E. The CME Group Risk Management Handbook (2010) Hoboken, New Jersey: John Wiley & Sons, p. 80

Further reading[edit]

External links[edit]