What Are Clearing Houses and How Do They Work?


When you make a financial transaction, the last thing you want to worry about is your money not getting to the correct destination. And that’s where clearing houses come in.

Simply put, a clearing house — also known as a participant or clearing firm and NOT to be confused with the marketing firm Publishers Clearing House (you know, the one that shows up at your house with the super-big checks and a bouquet of balloons) — is the common ground between two distinct financial firms. This unique institution takes on the risk of a transaction between two parties and makes sure that it’s settled to everyone’s satisfaction. It lowers the risk that one of the parties will fail in its obligation during a transaction. It’s the financial middle man — like a Brink’s truck that drives your money safely from Point A to Point B.

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Have you ever noticed the acronym “ACH” on your bank account statement? That means that a clearing house — the Automated Clearing House, to be exact — did its job. This financial network processes a HUGE number of financial transactions, including direct deposits and bill payments. In fact, in 2015 alone, the ACH processed nearly 24 billion transactions worth just shy of $42 trillion.

For investing purposes, stock brokers use these firms for transactions to handle the nitty-gritty of buying and selling a trade. How is this done, and what impact does a clearing house have on your trades?

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