What is Clearinghouse?

Describes a financial institution that facilitates all activities required to “clear” a transaction. Precious metal commodities require specific certifications, transport, and other asset-specific activities to complete the trade. By law, these activities must occur through a designated clearinghouse.

The primary role of the clearinghouse is to facilitate all steps associated with the financial transactions including payments, securities, and derivatives. In essence, a clearinghouse standardizes all steps of a transaction and acts as a mediator ensuring that participants honor preset obligations that help to mitigate risk between parties.

The idea of a Clearinghouse was first proposed in 1936 by the French-born Italian financier named Philip Burlamachi, financial advisor to King George I. His idea to have one central place in which all large financial transactions should be conducted, became the foundation on which the Bank of England was later established.

The history of bank clearinghouse operations in the United States can be traced back to the 18th century. The first clearinghouses were established in the U.S. in:

  • 1818 in Boston
  • 1850 in New York
  • 1858 in Philadelphia.

Stock markets followed the banks’ example and began to establish clearinghouses including:

  • Philadelphia Stock Exchange in 1870
  • New York Stock Exchange in 1892

Checks were the first financial payment that required clearing because checks had to be returned to the issuing bank before an individual or organization could receive payment. In 1913, The Federal Reserve System established a check clearing system. The goal of the system was to avoid unrest instigated by banks refusing to accept checks from troubled banks.

The U.S. has the largest clearing system in the world, with trillions of dollars being cleared daily. Most of these transactions are cleared through financial organizations that hold accounts with The Federal Reserve bank. Therefore, the Fed performs a critical role in negotiating transactions, and clearing and settling both national and international bank transactions.

See Also…

Commodity Markets, Over-the-Counter (OTC), Swaps, Dodd–Frank Act, COMEX

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