Clearing Firm (Clearing Broker)
The term clearing firm refers to a company that works directly with a clearing house to execute trades on behalf of investors in futures contracts. Clearing firms act as an intermediary between traders and the clearing house.
ExplanationAlso referred to as a clearing broker, a clearing firm works with an exchange's clearing house to execute trades on behalf of investors. When a trader opens an account with a brokerage house, that is also a clearing firm, the brokerage house can both execute buy and sell orders and maintain their client's assets. Brokerage houses that are not carrying firms are known as introducing firms, and they will have an arrangement with a carrying firm on the exchange.
Examples of carrying firms that have widespread access to the clearing houses of commodity futures exchanges include Barclays Capital, Citigroup Global Markets, Credit Suisse International, Deutsche Bank, Goldman Sachs, HSBC Securities, J.P. Morgan Securities, Merrill Lynch, Pierce, Fenner & Smith, Morgan Stanley, and Wells Fargo Securities.
Clearing Firms versus Clearing Houses
The role of a clearing house is to act as an intermediary between buyers and sellers. They bring order to, and instill confidence in, a market by guaranteeing contract performance. Clearing firms have direct access to the clearing house; therefore, when clearing firms are on both sides of a transaction, only three parties are involved.
Most traders are not clearing firms; therefore, they must work through one to complete a transaction. If the counterparty isn't a clearing firm, there are a total of five parties to the transaction: a seller, the seller's clearing firm, the clearing house, the buyer's clearing firm, and the buyer.