What is a clearing house?
A clearing house is a common entity through which participants exchange transfer instructions for funds, securities or other instruments. A clearing house that steps between the buyer and the seller of each trade is a central counterparty (CCP). In the EU, a CCP needs an authorization under EMIR. The German terms are Clearingstelle and zentrale Gegenpartei.
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Clearing houses in brief
| Term | Clearing house, central counterparty (CCP). German: Clearingstelle, zentrale Gegenpartei. |
|---|---|
| Legal source | Regulation (EU) No 648/2012 (EMIR) of , amended by Regulation (EU) 2024/2987 (EMIR 3). |
| Authorization | By the competent authority of the member state, valid in the whole EU (Article 14 EMIR). |
| Minimum capital | 7.5 million euros of initial capital (Article 16(1) EMIR). |
| Default resources | Enough to withstand the default of the two clearing members with the largest exposures (Article 43(2) EMIR). |
| Supervisors | BaFin in Germany, FMA in Austria, FINMA in Switzerland. |
What does a clearing house do?
A clearing house calculates what each participant owes and makes sure the obligations are met. The clearing definition in finance in EMIR reads "the process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from those positions". That is the clearing house meaning in the derivatives and securities markets.
A CCP goes one step further. EMIR defines it as "a legal person that interposes itself between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer". Clearing house explained with an example: a bank sells a Bund future on an exchange, and an asset manager buys it. After clearing, the bank has a contract with the CCP, and so does the asset manager. If the bank fails, the asset manager's contract with the CCP stands.
What is a clearing house in banking?
A clearing house in banking is the place where banks present and exchange payment orders and calculate their mutual positions before settlement. The ECB describes a clearing system as a set of rules under which financial institutions exchange data on transfers of funds or securities "at a single location (e.g. a clearing house)". The clearing house often nets the positions, and the net amounts then settle in a settlement system. See Clearing vs settlement: how do they differ?
What is a clearing firm? In EMIR the term is clearing member: "an undertaking which participates in a CCP and which is responsible for discharging the financial obligations arising from that participation". A company that must clear a derivative becomes a clearing member, a client of a clearing member, or uses indirect clearing (Article 4(3) EMIR).
How does a CCP cover the default of a clearing member?
A CCP covers a default with collateral and funds that it collects in advance. Margins must cover losses from at least 99% of the exposure movements over an appropriate time horizon (Article 41 EMIR). Each clearing member also pays into a default fund (Article 42). Article 45 sets the order in which a CCP uses these resources, called the default waterfall:
- The margins of the defaulting clearing member.
- The default fund contribution of the defaulting clearing member.
- Dedicated own resources of the CCP.
- The default fund contributions of the other clearing members.
A CCP may not use the margins of clearing members that did not default.
What does the European Market Infrastructure Regulation (EMIR) require?
The European Market Infrastructure Regulation, EMIR, requires central clearing for the classes of OTC derivatives that are declared subject to the clearing obligation, and it sets the rules for CCPs. Under Article 4, counterparties clear all OTC derivative contracts of such a class. A CCP established in the EU applies for authorization to the competent authority of its member state (Article 14). Each member state names that authority (Article 22).
EMIR 3 is Regulation (EU) 2024/2987 of . Its new Article 7a is the active account requirement. Financial and non-financial counterparties that are subject to the clearing obligation and exceed the clearing threshold in the categories of derivatives listed there hold at least one active account at a CCP authorized in the EU. They clear at least a representative number of trades in that account.
CCP vs CSD: what is the difference?
A CCP stands between the two sides of a trade until it settles, and a CSD settles the trade by moving the securities. The CCP CSD difference follows from the two EU definitions.
| CCP vs CSD | Central counterparty (CCP) | Central securities depository (CSD) |
|---|---|---|
| Role | Becomes buyer to every seller and seller to every buyer | Operates a securities settlement system and at least one other core service |
| Step in the trade | Clearing | Settlement |
| Members | Clearing members and their clients | Participants in the securities settlement system |
| EU law | EMIR, Article 2(1) | CSDR, Regulation (EU) No 909/2014, Article 2(1)(1) |
Clearing houses in Germany, Austria and Switzerland
In Germany and Austria, EMIR applies directly. Eurex Clearing AG in Germany is licensed as a credit institution under BaFin supervision and received its authorization as a CCP under EMIR on . It serves about 200 clearing members in 22 countries (Eurex Clearing). In Austria, CCP Austria clears the securities trades of the Vienna Stock Exchange and electricity trades on EXAA (CCP Austria). The FMA is the Austrian supervisor.
Switzerland is outside the EU, so EMIR does not apply there. The Financial Market Infrastructure Act (FinMIA) governs central counterparties in its Article 48, and FINMA supervises them. SIX x-clear AG is a licensed Swiss CCP that also operates as a third-country CCP in the EU and the UK (SIX, Clearing). FINMA recognized Eurex Clearing as a foreign central counterparty on . This page gives no legal advice.
Sources
- European Union: Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories,
- European Union: Regulation (EU) 2024/2987 as regards measures to mitigate excessive exposures to third-country central counterparties and improve the efficiency of Union clearing markets,
- European Union: Regulation (EU) No 909/2014 on improving securities settlement and on central securities depositories,
- European Central Bank: Glossary, entries "clearing house", "clearing system" and "central counterparty", read on
- Eurex Clearing: Licensing and supervision and Company profile, read on
- CCP Austria: The Clearing House for Exchange Transactions, read on
- SIX: Clearing, read on
- FINMA: Financial market infrastructures, read on