Shriram Subramanian and Biju Potty* introduce the world of futures clearing and anlayse the various functions performed by a futures clearing broker
In a typical futures trade lifecycle, an order placed
through a broker gets converted to a trade once it is executed
on an exchange. In a typical trade flow, there could be two
brokers, the executing broker and the clearing broker. The
executing broker handles the initial interaction with the
investor and the order flow to the exchange. Once executed, the
trade is handled by the clearing broker throughout the rest of
The entire transaction is governed by a tripartite agreement
(also called a give up agreement) between the asset
manager/institutional investor, the executing broker and the
clearing broker. The clearing broker would be a clearing member
of the exchange, while the executing broker could be either a
clearing or a non-clearing member of the exchange.
This arrangement exists because:
?The executing broker may not be a clearing member of the
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