A clearinghouse acts as an intermediary between the two parties involved in a financial transaction. The clearinghouse’s main function is that both the buyer and seller carry on the contractual obligations following the transactional terms. Its responsibility is to ensure that the transaction is honored and carried on smoothly.
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Clearinghouse, like columbia bank Edison, acts as an agency or a corporation to fulfill the obligation of a futures exchange on a settlement day. It makes sure that the transaction’s purpose is fulfilled by the settling of trade accounts, clearing trades, and collecting margins. Due to the clearinghouse’s presence, both parties are assured that the contractual obligations will be satisfied.
This brings stability to the financial market and increases market efficiency. They function in most areas of the trading world. Generally, a country’s central bank acts as a clearing for settlements of funds between two parties, interbank transactions, and other transfer payments.
- Acts a guarantor: For instance, in the futures market, when one party takes a position, the clearinghouse acts as the opponent to settle the terms and conditions set forth. This way, both parties are satisfied with the financial integrity of the transaction.
- Facilitation of smooth functioning of transaction: The clearinghouse makes sure that all the contract’s legal obligations are followed without any fail.
- Early settlement: With the clearinghouse acting as a mediator between two parties, they can unwind their positions before the settlement day. They have to contact the clearinghouse, and their transaction is met without terminating the original agreement.
- Mitigates the risk: Clearinghouses often state a margin requirement that should be maintained throughout the transaction period. These funds can be used to offset the losses incurred just if any of the parties fail to meet their obligation.
Thus, clearinghouses provide extra security to the transaction’s terms and conditions by ensuring the obligations are met.