Clearing House

In finance, a clearing house or clearing agent is a financial services provider which processes the clearing of transactions.

Clearing houses act as intermediaries between buyers and sellers to ensure that payment is made and purchased securities, goods or services are delivered.

Typically, clearing houses act as escrow agents, holding money on behalf of all parties in a transaction and transferring money from one deposit to another to settle commercial transactions.

Example: You use a debit card to pay for services received from a merchant. Your bank and the merchant’s bank both hold deposit accounts at a clearing house. When the commercial transaction is reported to the clearing house, it transfers the relevant amount of money from your bank’s deposit account to the deposit account of the merchant’s bank.

Example 2: You place an order with your stock broker for the purchase of shares in a stock. After your broker buys the shares on your behalf, a clearing house transfers the corresponding amount of money from your broker’s deposit account at the clearing house to the deposit account of the broker which sold the shares.

As the examples above show, clearing houses enable fast financial transactions to be made without risk of payment default by holding money in deposit accounts on behalf of the parties involved and settling commercial contracts on behalf of these parties.

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