Futures clearing

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The presence of a futures clearing house (or clearing division) is a crucial facility when it comes to performance guarantees. The clearing house's function -- to be the buyer to every seller and the seller to every buyer -- is in stark contrast to over-the-counter transactions; transactions between two private parties, with no clearing organization to stand between them to ensure performance of the agreement, can potentially leave a trader at risk for default.

A futures clearing house also tracks traders’ profits and losses on a daily basis -- during volatile markets, sometimes twice a day -- to assure that their accounts are credited and debited accurately.

If losses bring a trader’s futures account down to a certain predetermined level, the brokerage firm makes a margin call, known as maintenance margin, and the trader is required to bring the account value back up to the initial margin level. This is called mark-to-market, and it offers traders an opportunity to take close stock of their money management on an ongoing basis, allowing them to better manage their risk appetite and manage their accounts. With futures, trading losses are never allowed to accumulate from day to day, adding an additional layer of risk protection.

Also See

For equity options, see The Options Clearing Corporation.