CME Group » Clearing » Clearing Overview
Clearing Overview

Back to Clearing Home

 

Overview of CME Clearing

What Is Clearing?

People who buy and sell futures contracts on a futures exchange do not buy and sell directly to one another. They actually buy contracts from and sell contracts to a clearing house, which stands in between all trades to ensure that the obligations involved in the trades are made good.

By serving as the buyer to every seller and the seller to every buyer, the clearing house virtually eliminates credit risk for each market participant.

Why Central Counterparties Are Important

A central counterparty provides an important customer advantage compared to over-the-counter markets – the OTC markets.

In those markets, participants trade directly with one another. This leaves them open to the possibility of default by one of the parties to the trade. Central clearing was created to remove that risk.

What Is a Clearing House?

A clearing house is a financial institution comprised of members, highly capitalized, closely monitored and carefully selected companies that keep funds on deposit with the clearing house. Clearing members represent the trades of their customers and vouch for the soundness of their customers’, as well as their own, accounts.

The Legal Term: Novation

The substitution of counterparties is accomplished through a legal process called contract novation.

Novation discharges the contract between the original trading counterparties and creates two new, legally binding contracts – one between each of the original trading counterparties and the central counterparty.

Other Roles of the Central Counterparty

The role of the central counterparty has expanded over time to include:

  • Transaction processing
  • Post trade management functions
  • Financial management of members collateral deposits
  • Final settlement of outstanding obligations through financial payment or physical delivery
  • The overall risk management of market participants
  • A financial guarantee of performance of its contracts

Why CME Clearing

CME Clearing provides industry-leading risk management - an important part of the CME Group value proposition. In its more than 100-year history, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations; nor has there been a failure of a clearing member firm resulting in a loss of customer funds.

By marking positions to market twice each day, CME Clearing helps to limit the accumulation of losses or debt - helping each customer manage its risk as well as containing risk for the market as a whole.

CME Clearing is available 24-hours a day, six days a week. It has helped customers manage risk during periods of unprecedented derivatives industry growth and times of economic uncertainty.

Back to top  |  Back to Clearing Home