What Is a Clearing Member?

A clearing member is a firm or financial intermediary which is also a member of a clearing house. It is authorized to act as an intermediary between buyers and sellers in the market and is responsible for both the clearing and settlement of trades, which ensures that both the buyers and sellers fulfil their contractual obligations including the transfer of funds and securities.

They also manage the credit risk of their clients by guaranteeing to settle all the obligations due to the clearing house. To qualify as a bona fide clearing member, one has to meet strict high levels of capital, robust risk management controls and operational standards set by the clearing house. Clearing members often collect and post margins to manage potential losses and ensure that all trades are reported and compliant with market and regulatory rules.

There are various types of clearing members but in the main you have General Clearing Members who provide clearing services for themselves and other clients and Direct Clearing Members who can only clear their own trades. The role clearing members play in reducing counterparty risk and ensuring market stability is crucial, without them derivative markets in which StoneX offers a complete suite of futures and options solutions would face greater systemic risk.  

As a major financial services company with capabilities in clearing, custody, execution and prost-trade services, StoneX is required to meet stringent capital, operational and regulatory requirements. If a client defaulted as a clearing member, StoneX would in theory have to absorb the obligations or losses, however given the multiple layers of protection for the firm, which include margin calls and default funds, these risk management strategies would have to fail prior to StoneX having to meet those losses and obligations.

Learn more about StoneX's flexible risk management solutions.

How do clearing and non-clearing members operate?

Clearing members operate by acting as financial intermediaries between traders and the clearing house. They guarantee the completion of trades for others by calculating and settling obligations, managing risk through margin collection and ensuring the transfer of funds and securities. They also clear deals on behalf of other trading members and clients by becoming the contractual counterparty to the clearing house. As a clearing member the key functions include calculating daily obligations, managing margin requirements to cover potential losses and facilitating the physical settlement of trades by ensuring that the funds and securities are transferred to the correct accounts.   

Non-clearing members tend to have direct access to trade on an exchange but do not have the rights or infrastructure to clear its own trades through the clearing house. They must rather rely on a clearing member, sometimes known as a 'sponsoring' or 'general clearing member', to handle both the clearing and settlement process.  

What is the role of clearing members in financial markets?

Clearing members play a crucial role in financial markets; they not only clear and settle trades on behalf of themselves, but depending on the type of clearing member also their clients. They also provide market infrastructure by acting as a central counterparty (CCP), which steps in as a buyer to every seller, and a seller to every buyer, for derivative transactions. By monitoring trades, being a CCP and guaranteeing that trades are always completed even if a party defaults, the integrity of the market is secure and provides a safeguard against systemic risk.

Learn more about StoneX's global multi-asset custody, clearing and technology solutions and experience exceptional US and international clearing and custody services offering the best in customer service, global access and consistent innovation in pre and post-trade technologies.

Types of clearing members

When it comes to different clearing members you find Self-Clearing Members who only clear their own trades, Trading Member-cum-Clearing Members who clear their own trades and others, and Professional Clearing Members who clear trades for other trading members but do not trade for themselves. The derivatives market also has Direct Clearing Members that clear only their own and affiliated transactions which may use Non-Clearing Members or Indirect Members who trade but clear through a third party.

As a leading global Futures Commission Merchant with roots dating back a century, StoneX's comprehensive suite of institutional-grade futures clearing and execution services delivers broad exchange access and transparency to our clients worldwide.

Clearing member vs. Trading member

A Trading Member typically trades on both their own account and on behalf of clients using a clearing member. A Clearing Member is also responsible for clearing and settling trades, managing risks and handling the final settlement for the Trading Members who use their services. A Trading-cum-Clearing Member can do both: trade for themselves and clients and also clear and settle trades.   

Requirements to become a clearing member

Clearing members are a crucial part of the derivative financial market infrastructure. By acting as a CCP which steps in as a buyer to every seller and a seller to every buyer they not only guarantee that trades are completed but also ensure that the integrity of the market is secure.

However, given this crucial role securing a license to become an authorized clearing member requires an entity to be adequately capitalized, secure the necessary cash and securities account for settlement and collateral, and demonstrate the technical connectivity and understanding of the clearing system.

What are the risks and responsibilities of a clearing member?

Clearing members form a crucial part of the infrastructure for derivative financial markets. By acting as a central counterparty which steps in as a buyer to every seller and a seller to every buyer they not only guarantee that trades are completed but also ensure that the integrity of the market is secure.

The risks faced by clearing members

Despite the safeguards clearing members face several risks.

Counterparty risk

Whilst central counterparties reduce bilateral counterparty risk, clearing members are still exposed to the CCP and the risk that another member defaults (default fund exposure).

Liquidity risk

Liquidity risk is a critical risk faced by clearing members a sudden spike in margin requirements can not only strain resources but when a margin call occurs it can be large and frequent, requiring members to have access to significant liquidity.

Market risk

In the event that a client defaults the clearing member will need to take over or liquidate the client’s positions which may expose them to adverse market movements.

Default fund exposure

Clearing members are jointly liable should another member default, when this happens they might need to contribute additional funds.

Operational risk

Clearing members also face several failures in systems, processes or human errors which can lead to missed settlements, reporting errors and financial loss.

Legal and regulatory risk

This is a significant risk for clearing members as non-compliance with regulatory standards or clearing house rules can lead to penalties or loss of membership.

Reputational risk

Managing your reputation as a clearing member is crucial, the failure to manage risks adequately can damage their reputation with clients, regulators and the market.

FAQs

What is the main function of a clearing member?

The main function of a clearing member is to act as an intermediary between traders and the clearing house. It’s also to ensure that all trades are guaranteed, settled and risk-managed. The guarantee to facilitate the clearing and settlement of trades through the clearing house while managing the risks associated with this role are crucial.

Who can become a clearing member?

To become a clearing member a firm or financial intermediary needs to be highly capitalized. Applicants also need to meet specific risk management, capital and the operational requirements set by the clearing house, which include submitting an application form, a portfolio of evidence and demonstrating the capacity to assess, monitor and control the risk associated with client trades. Requirements and application processes vary depending on the jurisdiction or clearing house.

How does a clearing member differ from a clearing house?

 A clearing house is the central financial institution that guarantees and settles financial trades. It acts as the CCP to both the buyer and seller. On the other hand a clearing member is a firm that has permission to trade through the clearing house handling its own and its clients’ obligations whilst providing margin to the clearing house to mitigate risk. Clearing houses like StoneX provide the infrastructure and clearing members are the specialized institutions that use that infrastructure to manage trades and client risk.

Are clearing members the same as brokers?

No, clearing members and brokers are not the same, brokers are typically intermediaries who execute trades on behalf of clients and provide market access. Clearing members handle the back-office operations once a trade is executed, they also step in to guarantee trades, manage settlement and financial obligations to the clearing house or exchange like the Chicago Mercantile Exchange which facilitates trading in futures and options contracts. 

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This material is for informational purposes only and should not be considered as an investment recommendation or a personal recommendation.