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Clearing Firm (Clearing Broker)

Moneyzine Editor
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Moneyzine Editor
2 mins
January 11th, 2024
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Clearing Firm (Clearing Broker)

Definition

The term clearing firm refers to a company that works directly with a clearing house to execute trades on behalf of investors in futures contracts. Clearing firms act as an intermediary between traders and the clearing house.

Explanation

Also referred to as a clearing broker, a clearing firm works with an exchange's clearing house to execute trades on behalf of investors. When a trader opens an account with a brokerage house, that is also a clearing firm, the brokerage house can both execute buy and sell orders and maintain their client's assets. Brokerage houses that are not carrying firms are known as introducing firms, and they will have an arrangement with a carrying firm on the exchange.

Examples of carrying firms that have widespread access to the clearing houses of commodity futures exchanges include Barclays Capital, Citigroup Global Markets, Credit Suisse International, Deutsche Bank, Goldman Sachs, HSBC Securities, J.P. Morgan Securities, Merrill Lynch, Pierce, Fenner & Smith, Morgan Stanley, and Wells Fargo Securities.

Clearing Firms versus Clearing Houses

The role of a clearing house is to act as an intermediary between buyers and sellers. They bring order to, and instill confidence in, a market by guaranteeing contract performance. Clearing firms have direct access to the clearing house; therefore, when clearing firms are on both sides of a transaction, only three parties are involved.

Most traders are not clearing firms; therefore, they must work through one to complete a transaction. If the counterparty isn't a clearing firm, there are a total of five parties to the transaction: a seller, the seller's clearing firm, the clearing house, the buyer's clearing firm, and the buyer.

Related Terms

  • Clearing
    The term clearing refers to the process by which a clearing house becomes a buyer or a seller of a futures contract. Clearing houses maintain the integrity of the market by guaranteeing performance of a contract.
    Moneyzine Editor
    Moneyzine Editor
    January 11th, 2024
  • Clearing House (Futures Market)
    The term clearing house refers to an organization that stands between the clearing member of a buyer and seller. Clearing houses maintain the integrity of the market by guaranteeing performance of a contract.
    Moneyzine Editor
    Moneyzine Editor
    January 11th, 2024
  • Clearing Fee
    The term clearing fee refers to a charge levied by a clearing house for each futures contract cleared. Clearing fees may also be associated with services such as deliveries, creation of a futures position, block trades, transfers and adjustments.
    Moneyzine Editor
    Moneyzine Editor
    January 11th, 2024

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