A clearing house is a financial institution formed to facilitate the exchange (i.e., clearance) of payments, securities, or derivatives transactions.
Its purpose is to reduce the risk of a member firm failing to honor its trade settlement obligations.
[2] After the legally binding agreement (i.e., execution) of a trade between a buyer and a seller, the role of the clearing house is to centralize and standardize all of the steps leading up to the payment (i.e., settlement) of the transaction.
[5] Clearing houses were first proposed in 1636 by Philip Burlamachi, financier to Charles I of England.
Its competitor Consolidated's use of clearing houses finally forced the NYSE to follow suit (from 1892) to gain the same market advantages of at least prevention of frauds and reneging on bargains.
A 2019 study in the Journal of Political Economy found that the establishment of the New York Stock Exchange (NYSE) clearinghouse in 1892 "substantially reduced volatility of NYSE returns caused by settlement risk and increased asset values", indicating "that a clearinghouse can improve market stability and value through a reduction in network contagion and counterparty risk.