Question

Explain how the clearinghouse protects the futures market from credit risk.

Answer 1

Clearing houses Acts as Middleman between each trade which means once a trade is matched, the clearing house becomes the central counterparty (CCP) i.e. it becomes buyer to every seller’s clearing member and the seller to every buyer’s clearing member which eliminates Credit risk on both the sides in futures market. The CCP also manages risks in trades to minimize any impact on clearing members in the event of a default by various number of ways most commonly by Requiring Initial Margins as collateral , Making Margin calls to the party whose losses breach certain margin thresholds Etc. So this way clearinghouse protects the futures market from credit risk.