Clearinghouse | Practical Law

Clearinghouse | Practical Law

Clearinghouse

Clearinghouse

Practical Law Glossary Item 5-386-8222 (Approx. 4 pages)

Glossary

Clearinghouse

An entity that functions as a central counterparty (sometimes referred to as a CCP) for a "cleared" transaction providing a guaranty of each of the parties' payment obligations under the transaction so that each party may avoid assuming the credit risk of its trading counterparty. In a cleared transaction, the clearinghouse is inserted into the middle of the transaction, effectively becoming a counterparty to a new transaction with each of the parties to the original trade. Securities transactions, derivatives transactions such as futures and options and now, under Title VII of the Dodd-Frank Act, many swaps are cleared through clearinghouses. For details on how clearing works, see Practice Note, Mechanics of Derivatives Clearing. For information on mandatory swap clearing under Title VII of the Dodd-Frank Act, see Practice Note, Summary of the Dodd-Frank Act: Swaps and Derivatives: Swap Clearing Under Dodd-Frank.