A clearing house is a financial institution that acts as an intermediary between buyers and sellers in financial markets, ensuring trade settlement and managing counterparty risk. Clearing houses become the legal counterparty to both sides of every transaction, guaranteeing trade completion even if one party defaults. They collect margin deposits and mark positions to market daily.

Modern clearing houses provide essential market infrastructure by standardizing settlement procedures, maintaining market integrity, and reducing systemic risk. They operate sophisticated risk management systems including margin requirements, daily settlement, and default funds. Major clearing houses include Options Clearing Corporation (OCC), CME Clearing, and LCH Ltd for various asset classes.

Real-world example: When you buy a futures contract, the clearing house becomes your counterparty, eliminating concern about the original seller’s creditworthiness and ensuring contract performance through margin requirements and daily settlements.