In London, clearing houses are often referred to as the plumbing or “pipework” of the financial infrastructure; they are responsible for safely and efficiently handling enormous financial transactions including interest rate derivatives, payment securities and derivatives transactions. Clearing houses such as the London clearing house are essential for financial security.
Clearing houses have been around for a long time and provide a variety of services but the most basic include:
- Centralising and standardising specific financial transactions
- Reduce the cost of risk in clearing swap rates among multiple market participants
- Counterparty and guarantor to trades
Before clearing houses were established the process to pass financial checks and credit the clearing and settling process would take multiple banks and a time consuming process that was filled with blunders. The clearing house immediately resulted in a saving in both time and cost. The financial sector grew to rely on the clearing houses for safe and effective clearing and settling.
In response to the growth of interest rate swaps in the early 1990’s, the London clearing house was created and dealt with large portions of these transactions. However, for whatever reason, people were still hesitant to move all of their credit default swaps and OTC derivatives to the clearing houses. This was greatly changed after the economic crisis in 2008 when the world was seeking for a way to improve transparency and create systematic security.
Before the UK and their European counterparts required in 2012 that derivatives must be cleared through a third-party it was common for trades to be conducted bilaterally and therefore a lot of transactions went without sufficient collateral or mechanism to guarantee against loss or default.
The London clearing house aims to resolve these major problems in the over-the-counter (OTC) derivatives market by being the third party between the buyer and the seller. The clearing houses also provide transparency and guarantees there is an insurance policy in place to protect companies that do not default.
As clearing houses grow, it’s important that clients, governments and executives are setting advanced and effective marketing standards and guarantee that there is a high standard of safety.
Clearing houses are vital to the role of financial infrastructure to strengthen and safety the clearing, settling, and OTC derivatives in the sector by offering supervision, thorough financial background checks, guarantees and more.