Companion·Question

What is the difference between a clearing broker and a clearing member?

Codex No. 1 · Derivatives Clearing: A Comprehensive Guide

Clearing member names a standing at the central counterparty: the right to face the CCP directly, granted to institutions that meet its membership requirements. Clearing broker names what a firm does with that standing when it clears for someone else. In client clearing the two are normally the same institution, carrying one name toward the CCP and the other toward the client.

So the two words answer different questions. Ask who the CCP's counterparty is, and the answer is the clearing member. Ask who the client's counterparty is, and the answer is the clearing broker. The distinction is not cosmetic: it decides who owes what to whom, and what happens when one of them fails.

Drawn from a book written from the clearing broker's side of the trade, for the people who run it — operations, risk, treasury and collateral, at brokers and on the buy side alike.

The two roles

Clearing member

Financial institutions, chiefly banks and securities firms, that connect directly to the CCP and are qualified to use its clearing services. Membership requirements are stringent, which is why the great majority of market participants reach the CCP through someone else.

Clearing broker

The same institutions, acting for others: intermediating clearing for market participants that cannot reach the CCP directly, managing those clients' risk, and posting margin with the CCP on their behalf.

Clearing participant, FCM

Other names for the clearing broker. FCM — futures commission merchant — is the United States registration category; in practice the terms are used almost interchangeably.

Two ways to use one membership

Direct clearing

A clearing member clears its own trades at the CCP.

Client clearing

Asset managers, hedge funds, pension funds, insurers and non-financial corporates, none of them members, reach the CCP through a clearing broker.

The membership is the same in both cases. What changes is whose trades are being cleared.

One trade becomes two

When a client's trade is cleared, the original trading relationship is severed and decomposed: one trade between the client's original counterparty and the CCP, and one between the client and its clearing broker. The client gains the CCP's guarantee, and multilateral netting across its counterparties, through the broker. The broker in return guarantees the client's performance to the CCP, assuming the client's default risk toward it.

That is where the difference sits. A clearing member owes the CCP for its own book. A clearing broker owes the CCP for its clients' books as well — and carries the risk that they will not pay.

The MapOne firm, two names

Clearing member is a standing at the CCP. Clearing broker is what a firm does with it.

Where the difference bites

If a client fails, the broker answers to the CCP. The client has no standing there; the broker covers the exposure and closes out the position.

If the broker fails, the client cannot step into its place. Protection comes from two things instead. The first is the segregation model holding the client's margin, LSOC and ISA among them. The second is porting: the transfer of the client's positions and margin to another sound clearing broker, inside a window the CCP sets that may run from several hours to several days. If no transferee is found in that window, the CCP liquidates the client's positions.

Where the book takes this further

Chapter 1

The clearing broker as the gateway to the CCP, and what direct clearing and client clearing each require. “Having spent many years of my career in this business, I devote this section to a detailed examination of the clearing broker’s role.”

Chapter 5, Column Q

The default of a clearing broker: client asset protection, LSOC and ISA, and how porting actually runs.

Chapter 6

The segregation models, and the clearing documentation that decides what a client gets back.

What is in each chapter →

The Book

Written by Shun Yanagisawa — Director, Head of Futures, Clearing and FX Prime Brokerage, Markets Sales at Citigroup Global Markets Japan Inc. He is a Representative Director and Vice President of FIA Japan and the Chair of its Operations Committee, and sits on the JSCC Interest Rate Swap Steering Committee and the advisory board of Asia Risk. Full biography on the book page →