Collateralising Clearing Exposures1

Abstract As briefly indicated in Chapters 1 and 9, clearing is a process that takes place after trading and before settlement. Its purpose is to manage the credit exposures that arise during this interval between the parties to a trade. The core function of clearing is the novation of market contracts, whereby a clearing houseis interposed between the original trade counterparties. Trades are novated so that the original contract between the buyer and the seller is replaced by two new contracts, one between seller and the clearing house and buyer, one between the buyer and the clearing house as seller.