How does it work?
All clearing processes require two key steps at the beginning:
- Acceptance and eligibility
Acceptance and Eligibility
A clearing house would not want to clear a trade when:
- The product isn't clearable by the clearing house. This filter is often applied before a trade is sent to the clearing house, but even so the systems still perform the check on the incoming trade details
- Either party to the trade is in default. If either one of you has gone bust, no more trades will be accepted
- Both parties have sufficient margin held at the clearing house to cover the additional risk of this new trade. Most firms maintain sufficient assets at the clearing house to avoid this outcome. A fallback is for the clearing house to call your firm for more margin to cover the new trade
Once a trade meets the criteria above, the clearing house begins to process the trade and communicates to both parties that it has been accepted. At that moment and not before, both parties will then update their own records to indicate that their counterparty to the trade is now the clearing house, and not each other.
The diagram below shows a typical trading and clearing process, assuming both parties are direct members of the clearing house.