A body that becomes buyer to every seller and seller to every buyer, guaranteeing performance. It manages risk through margin and a default fund.
Where you will meet it
Clearing house comes up in 45 learning outcome notes across the FRM syllabus.
A few of them:
Introduction to Derivatives FRM Part I · Financial markets and products
“Exchange-traded derivatives are standardised in size, maturity and delivery, and trade on an exchange where a clearing house becomes the counterparty to both sides.”
Credit Risk Transfer Mechanisms FRM Part I · Foundations of risk management
“These were standardised contracts with fixed coupons and upfront payments, central clearing through central counterparties, and trade reporting.”
Fundamentals of Credit Risk FRM Part II · Credit risk measurement and management
“In clearing, members are exposed to the central counterparty and it to them.”
The Failure Mechanics of Dealer Banks FRM Part II · Liquidity and treasury risk measurement and management
“Structural measures include the Volcker rule limiting proprietary trading, central clearing and margin for standardised OTC derivatives, resolution plans, and temporary stays on termination rights.”
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