What is Clearing in Futures Trading?

In the context of futures trading, clearing is a crucial process that ensures financial transactions run smoothly and securely. If an exchange is where buy-sell transactions occur, the clearing house is responsible for facilitating the guarantee and settlement of those transactions.

A clearing house is a business entity that assists and guarantees the settlement of futures trading transactions. This institution is also regulated under Law Number 10 of 2011. The duties of the clearing house in Article 26 of that law include:

• Providing adequate facilities for the implementation of guarantee and settlement of Futures Contracts, Sharia Derivative Contracts, Other Derivative Contracts, and/or physical commodity transactions as referred to in Article 15;

• Receiving registration and guaranteeing the settlement of every Derivative Contract transaction other than Futures Contracts and Sharia Derivative Contracts from Organizers and Brokers of Alternative Trading System Participants, and

• Formulating regulations and procedures of the Futures Clearing House.

Functions of a Clearing House

There are several functions of a clearing house, including:

• Trading loss risk management

• Balancing transactions in the market

• Managing margin requirements of members

• Facilitating regular fund transfers

• Facilitating orderly closure through auction mechanisms for contractual obligations of defaulting parties

• Specifically for physical delivery settlement, the clearing house has a novation function, which guarantees the fulfillment of rights/obligations from commodity buyers/sellers.

Role of a Clearing House

• The clearing house enters the trade when a transaction occurs on the exchange; specifically taking a position between the seller and buyer to ensure that both parties fulfill their respective obligations.

• Responsible for transaction settlement, handling margin payments and other reporting related to fulfilling transaction obligations (such as goods delivery or fund disbursement).

• Mitigating risks of commodity and derivative transactions through margins from both parties.

• Finalizing and validating transactions after they occur.

• Risk mitigation function by becoming the buyer or seller in a transaction to address default risk.

• Establishing margin requirements for both parties as collateral before and during the transaction

Getting to Know ICH Clearing House

The clearing house plays an important role in various asset transactions, including futures commodity product transactions. Indonesia Clearing House (ICH) is one of the clearing houses that handles futures commodity trading in Indonesia, which is also part of the ICDX exchange ecosystem, together with ICDX Logistik Berikat (ILB).

As a business entity, ICH assists and guarantees the settlement of futures trading transactions that occur on the ICDX futures exchange. This means that after a transaction is recorded on the ICDX exchange, ICH will be responsible for settling it.

Two settlement methods commonly used by ICH are:

• Physical Delivery: This settlement is carried out by paying funds to the seller and delivering physical goods to the buyer.

• Cash Settlement: This settlement involves payment or receipt of cash to the parties involved in the transaction. As an example, a product that uses the cash settlement method is GOFX.