clearinghouse

play
noun clear·ing·house \-ˌhau̇s\
Updated on: 26 Jul 2017

Definition of clearinghouse

  1. 1 :  an establishment maintained by banks for settling mutual claims and accounts

  2. 2 :  a central agency for the collection, classification, and distribution especially of information; broadly :  an informal channel for distributing information or assistance

Examples of clearinghouse in a Sentence

  1. an online clearinghouse for information on museums around the world

Recent Examples of clearinghouse from the Web

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'clearinghouse.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of clearinghouse

1792


Financial Definition of CLEARINGHOUSE

clearinghouse

What It Is

A clearinghouse is an intermediary between buyers and sellers of financial instruments.

How It Works

Clearinghouses take the opposite position of each side of a trade. When two parties agree on the terms of a transaction, a clearinghouse sits in the middle, acting as both the buyer and the seller. Clearinghouses exist to ensure the smooth functioning of financial markets. Fewer transactions would take place if sellers were worried that buyers would refuse to pay them, and vice versa. A clearinghouse ensures that transactions happen as planned.

For example, if you agree to sell your 100 shares of Company XYZ to John for $10,000, the clearinghouse ensures that John is delivered the 100 shares and you are delivered $10,000. It also records and reports the transaction to everyone involved. Either way, the clearinghouse is responsible for ensuring that the transaction happens in an accurate and timely manner.

Clearinghouses operate in most areas of the business world. For example, in the futures markets, clearinghouses ensure that the buyers and sellers fulfill their obligations related to the futures contract being traded and oversee the proper delivery of the underlying instrument. A country's central bank (e.g. the Federal Reserve in the U.S.) acts as a clearinghouse for checks, interbank payments, foreign exchange transactions, and other fund transfers in the banking system.

Why It Matters

Clearinghouses, acting as middlemen between buyers and sellers, provide both efficiency and stability to the financial markets they serve. However, they take on a high amount of risk because they act as both buyer and seller for a brief moment in almost every transaction. If a buyer fails to pay for the securities he has purchased, the clearinghouse must seek recovery of the funds or wait for them to become available.

Because the clearinghouse is on the hook if either party defaults on their agreement, they generally will not process transactions for traders who take on too much risk. To mitigate risk, clearinghouses also often require traders to deposit additional funds into their brokerage accounts in order to maintain minimum "margin requirements." These funds ensure that the clearinghouse will have access to enough funds to offset losses incurred by traders to get in over their heads and fail to meet their financial obligations.


CLEARINGHOUSE Defined for English Language Learners

clearinghouse

play
noun

Definition of clearinghouse for English Language Learners

  • : a business that banks use to exchange checks and money between them

  • : an organization that collects and gives out information about a specific thing


Law Dictionary

clearinghouse

play
noun clear·ing·house \ˈklir-iŋ-ˌhau̇s\

Legal Definition of clearinghouse

  1. :  an institution that arranges for payment of checks owed by one bank to another



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