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14 Nov 2015


Hi Friends,    Discuss the functions and importance of Clearing House in  Stock Market:
Clearing House provides range of services related to guarantee of contracts,  Clearance and settlement of trades, management of risks of their members and associated exchanges.  The clearing house acts as a medium of transaction between the buyer and seller.  Every contract between the buyer and seller is substituted by two contracts, so that clearing house becomes the buyer to every seller and the seller to every buyer. 

Importance of clearing house are as under.  1. It ensures adherence to the system and procedure for the smooth trading.  2.  It minimizes the credit risk by being counter party to all the trades.  3.  It involves daily accounting of gains and losses.  It ensures delivery of payment for assets on the maturity dates for all outstanding contracts.  5. It monitors the maintenance of speculation margin.  A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions.  These transactions may be executed on a future exchange or securities exchange, as well as off-exchange in the over-the-counter(OTC) market.  A clearing house stands between two clearing firms (also known as member firms or clearing participants) and its purpose is to reduce  the risk of one (or more) clearing firm failing to honour its trade settlement obligations.  Clearing house is defined as entity which is different from the exchange, although it works closely with the exchange so that day to day operations of the exchange can run smoothly.  Clearing house is integral part of derivative market.

Here are some of the important functions performed by the clearing house:  1. As clearing house give guarantee to all the transactions and acts as  a counter party for all the transactions it will never have open position in the market.  2. It ensures that all the parties adhere to the system and procedures so that various parties in the market can do trading smoothly which in turns leads to more confidence of  the player on the market and hence it increases liquidity in the market.  3.  It ensures a proper risk management system in place by stipulating that margin is maintained which is of two types-initial and maintenance margin and hence accounting is done for all the gains and losses on daily basis and hence chances of default are reduced considerably.  4.  It ensure the delivery of the underlying assets is consistent in terms of quality, quantity , size etc... so that there is no confusion among parties,  in other words all contracts are standardized.  Hence from above we can say that clearing house is the backbone of the derivative market and is very important for smooth running of derivative market. 

Please send your comments and suggestions by e-mail.

Good Luck.                                                            See You Later.

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