Introduction to

Clearing

What Clearing Is and Why Does It Matter?

Clearing is the essential layer between trade execution and settlement, enabling safe, efficient, and scalable markets.

Clearing is key to digital asset markets – especially given proven practices from traditional finance do not yet apply; the absence of clearing infrastructure introduces significant inefficiencies and risks.

At the heart of central clearing are three foundational functions: novation, margining, and multilateral netting. Together, these reduce counterparty risk, unlock capital, and streamline post-trade operations.

Bilateral Arrangements vs Central Clearing

Without central clearing, market participants must engage in bilateral contracts with each counterparty to facilitate and settle trades. This is both operationally complex and capital inefficient. Each participant must assess counterparty risk, negotiate terms, and manage settlement individually — an approach that becomes increasingly burdensome in fragmented, high-volume markets like digital assets.

With over 500 venues for trading crypto assets, bilateral settlement exposes participants to numerous counterparties, each with varying degrees of risk and operational reliability. These arrangements often rely on “free of payment” (FoP) settlement, where one party delivers cash or assets without simultaneous receipt. This increases the likelihood of loss if the other side fails to deliver.

Moreover, in bilateral systems, the inability to offset exposures across counterparties means higher gross settlement amounts, duplicated collateral, and inefficient use of capital.

The Paperwork Crisis

In the 1960s, a surge in trading volumes overwhelmed Wall Street’s manual paperwork-based back office systems. This “paperwork crisis” caused massive settlement delays, misplaced trades, and even forced market closures. The financial system was simply not equipped to handle scale without automation.

The solution was clear: automate processes, centralise infrastructure, and introduce netting to reduce the sheer volume of settlement obligations.

Today, digital asset markets face a different kind of backlog: not physical paper, but fragmented systems, bilateral processes, and a lack of central coordination. Settlement occurs on a gross basis, trade by trade, draining liquidity and heightening risk. Without change, the industry risks a digital replay of history.

Just as traditional markets responded with clearing houses and net settlement, the digital asset space now needs purpose-built infrastructure to scale safely. Net settlement reduces friction, cuts risk, and provides the operational backbone markets need to thrive.

In contrast, with central clearing, there is no need for participants to onboard or manage every counterparty individually. The central counterparty (CCP) novates trades — becoming the buyer to all sellers and the seller to all buyers — and facilitates netting and collateralisation on a unified basis.

Core Functions of Clearing: Novation, Margining, and Netting

Central clearing relies on three tightly linked functions that work together to reduce risk and create efficiency at scale.

These are:

The first step in clearing is novation. When a trade is executed, it is legally transferred to the CCP, who becomes the counterparty to both sides. From that point on, each participant faces the clearing house — not the original trading partner.

This process breaks the direct credit link between trading counterparties, replacing a web of bilateral exposures with a single, trusted relationship. Participants no longer need to assess the creditworthiness of each trading partner, and in the event of a default, the CCP ensures the trade is completed.

  • Initial margin to cover potential future exposure
  • Variation margin to reflect market moves
  • A mutualised default fund shared by participants
  • The CCP’s own capital contribution

This structure creates certainty, reduces systemic risk, and makes the market more resilient to stress.

The CCP manages its exposure to each participant through the collection of margin:

  • Initial margin is posted to protect against the potential for future losses if a counterparty defaults.
  • Variation margin reflects day-to-day market changes in the value of open positions.

In a central clearing environment, margin is typically calculated at the portfolio level, enabling portfolio margining across all trading venues and counterparties. This is far more capital efficient than bilateral models, which require separate collateral arrangements with each counterparty.

Transparent, risk-based margin models aligned with global regulatory standards give participants greater control over risk and collateral use — a key requirement for institutional adoption.

One of the major benefits of central clearing is multilateral netting: the process of offsetting trades across all participants and venues into a single net obligation per settlement cycle.

Rather than settling each trade individually, a CCP calculates what each participant owes or is owed after all trades are netted. For example, 100 offsetting trades between counterparties might be compressed down to just a handful of net obligations — or even none at all — depending on trade terms and market conditions.

This reduces:

  • Gross settlement amounts
  • Collateral requirements
  • Operational complexity

This form of netting is essential for scaling digital asset markets, particularly where high-frequency or 24/7 trading is involved.

Each plays a critical role in transforming fragmented, bilateral trading activity into a single, unified post-trade environment that is safe, scalable, and capital-efficient.

Together, novation, margining, and multilateral netting form the foundation clearing; delivering the risk reduction, capital efficiency and post-trade certainty that markets are built on.

Horizontal Clearing Encourages Wide Market Participation

A horizontal clearing model supports multiple trading venues, custodians, and settlement banks — rather than being vertically integrated into a single platform. This enables cross-venue netting and consistent risk management, even in a fragmented digital asset ecosystem.

In traditional markets, clearing houses play this role as neutral infrastructure. In digital markets, however, many platforms manage credit, collateral, and settlement independently — or through affiliated custodians. This introduces significant inefficiencies and credit risk.

A neutral CCP that can novate, net, and margin trades across multiple sources of liquidity — including exchanges and OTC venues — brings the same stability and capital efficiency to digital assets that traditional finance has long relied on.

Execution
Digital Asset Trading Sources
Trading
Venue 1
Trading
Venue 2
Trading
Venue 3
Trading
Venue 4
ECNs
OTC
Clearing
ClearToken
Settlement & Custody*
Custodian
1
Custodian
2
Custodian
3
Custodian
(n)
Digital Asset Custodians
Settlement
Bank 1
Settlement
Bank 2
Settlement
Bank (n)
Settlement Banks
* ClearToken facilitates allocations to funds.

The Impact of Central Counterparty Clearing

Reduced Counterparty Credit Risk
Replace bilateral exposure with ClearToken standing between buyers and sellers, ensuring every trade settles even if a counterparty defaults.
Optimised Capital Efficiency
Unlock capital through multilateral netting and portfolio margining, reducing collateral requirements compared to bilateral settlement.
Standardised Risk Management
Shift risk from individual venues to a regulated CCP, with a multi-layered default waterfall and robust protections.
Seamless Trading & Settlement
Standardised clearing workflows integrated with our Delivery vs Payment (DvP) settlement service replaces fragmented and risky settlement processes and creates further netting opportunities.
Access to Fragmented Liquidity
Break down silos and connect liquidity pools across multiple venues through horizontal integration.
Regulatory Alignment
Our structure is designed to meet institutional requirements, providing a familiar, compliant environment that meets regulatory standards (subject to regulatory approvals).

Applying These Principles to Digital Assets

The principles of novation, margining, and multilateral netting are well-established in traditional capital markets. Their application to digital assets is not just beneficial, but critical for institutions seeking to scale market participation in a safe and efficient way.

A number of emerging clearing models are working to bring this infrastructure to digital assets. One example is ClearToken, a UK-based CCP specifically designed to support multiple digital asset trading sources, custodians, and settlement banks.

By applying the best practices of traditional clearing to the specific challenges of tokenised and digital assets, such models can help build trust, reduce systemic risk, and enable the next phase of institutional growth in the sector.

Looking Ahead

Subject to regulatory approvals, we intend to launch a clearing house supporting spot, perpetual futures, forwards and cleared repo, with options to be added in due course.