Clearing house

A clearing house is the entity that stands between every buyer and seller in a futures market, guaranteeing each trade and requiring both sides to post margin.

A clearing house sits between every buyer and seller on a futures exchange, becoming the legal counterparty to both sides of every trade rather than leaving them exposed to each other directly. This means a trader never needs to worry about the creditworthiness of whoever is on the other side of their contract; the clearing house guarantees performance regardless.

To protect itself, the clearing house requires every participant to post margin, collateral that covers potential losses, and issues margin calls when a losing position needs more collateral to stay open. This system is what allows futures contracts to be freely bought and sold among strangers with confidence that settlement will happen as agreed, regardless of who originally created the contract.