Clearing house (finance)
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A clearing house is a financial institution formed to facilitate the exchange (i.e., clearance) of payments, securities, or derivatives transactions. The clearing house stands between two clearing firms (also known as member firms or participants).
Its purpose is to reduce the risk of a member firm failing to honor its trade settlement obligations.[1] A clearing house provides emergency lending and assists banks when they need help.[2]
Description
After the legally binding agreement (i.e., execution) of a trade between a buyer and a seller, the role of the clearing house is to centralize and standardize all of the steps leading up to the payment (i.e. settlement) of the transaction. The purpose is to reduce the cost, settlement risk and operational risk of clearing and settling multiple transactions among multiple parties.[3]
In addition to the above services,
History
Clearing houses were first proposed in 1636 by Philip Burlamachi, financier to Charles I of England.[citation needed]
Bank clearance
The origins of clearing houses date back to bank cheque clearing in the 18th century. The London Clearing-House was established between 1750 and 1770 as a place where the clerks of the bankers of the city of London could assemble daily to exchange with one another the cheques drawn upon and bills payable at their respective houses. It replaced a system of clerks visiting every other banker in London.[6]
Financial exchanges
Other industries
The British Railway Clearing-House was established in 1842. Its purpose, as defined by the Railway Clearing-House Act of 1850, was "to settle and adjust the receipts arising from railway traffic within, or partly within, the United Kingdom, and passing over more than one railway within the United Kingdom, booked or invoiced at throughout rates or fares." The Irish Railway Clearing-House, established in 1848, had its headquarters in Dublin, and was incorporated by act of parliament in 1860. In 1888 a society was formed in London called the Beetroot Sugar Association for clearing bargains in sugar from sugar beet, and the London Produce Clearing-House was established in the same year for regulating and adjusting bargains in foreign and colonial produce.[13]
Central counterparty clearing
Modern central counterparty clearing (CCP) provides
Impact
A 2019 study in the Journal of Political Economy found that the establishment of the New York Stock Exchange (NYSE) clearinghouse in 1892 "substantially reduced volatility of NYSE returns caused by settlement risk and increased asset values", indicating "that a clearinghouse can improve market stability and value through a reduction in network contagion and counterparty risk."[14]
See also
References
- ISSN 0022-3808.
- ISSN 0002-8282.
- ^ "Speech by Chairman Bernanke on clearinghouses, financial stability, and financial reform". Board of Governors of the Federal Reserve System. Retrieved 2017-10-20.
- ^ Rehlon, Amandeep; Nixon, Dan. "Central counterparties: what are they, why do they matter and how does the Bank supervise them?" (PDF). Bank of England. Retrieved 1 April 2017.
- ^ "What is a Clearing House?". Corporate Finance Institute. Retrieved 31 January 2021.
- ^ Ingram 1911, p. 476.
- ^ Ingram 1911, p. 478.
- ^ Lloyd, H.D. (1899), "Clearing, and clearing houses", Cyclopædia of Political Science, Political Economy, and the Political History of the United States, vol. 1, New York: Maynard, Merrill, and Co, p. 223
- ^ "Philadelphia Stock Exchange | Encyclopedia of Greater Philadelphia". philadelphiaencyclopedia.org. Retrieved 2019-10-30.
- ^ Sobel, R. (2000) The Big Board. Washington, D.C.: Beard Books, p. 131 (Original work published 1965 New York, New York: Free Press)
- ^ Coffee and Tea Industries and the Flavor Field. Spice Mill Publishing Company. 1914. p. 1036.
- ^ Labuszewski, J.W., Nyhoff, J.E., Co R., and Peterson, P.E. The CME Group Risk Management Handbook (2010) Hoboken, New Jersey: John Wiley & Sons, p. 80
- ^ Ingram 1911, pp. 477–478.
- S2CID 201419723.
Sources
- public domain: Ingram, Thomas Allan (1911). "Clearing-house". In Chisholm, Hugh (ed.). Encyclopædia Britannica. Vol. 6 (11th ed.). Cambridge University Press. pp. 476–478. This article incorporates text from a publication now in the