How does Options clearing work?

Sept. 23, 2012 - PRLog -- On the sharemarket, all the trades are executed between a specific buyer and seller and settlement of the trade occurs three trading days later. In Australia, the ASX performs the functions of both trades and settlement.

Options are traded on the ASX; however, a separate organisation, ASX Clear, is responsible for the settlement function. This requires ASX Clear to both clear all options that are traded on the ASX and ensure that all contractual obligations relating to options are met. For instance, if an option holder wishes to exercise their option, ASX Clear is responsible for ensuring that they assign this to an option seller and that the seller meets this obligation. When you place an option order through your broker, your broker becomes your trading participant and is responsible for registering your trade with the ASX. When the trade is executed, a contract is created between your broker and the other party’s broker. This contract is called the market contract. At this point, a process of novation occurs in which the market contract is replaced by two separate contracts as follows:
   
1. a contract between your broker and ASX Clear
2. a contract between the other party’s broker and ASX Clear.  

Under this process of novation, ASX Clear becomes the counterparty to all open option positions. This means that you no longer have any relationship with the original counterparty to your option contract. As an option buyer, you do not need to assess the credit risk of the seller and their ability to meet their obligations if you decide to exercise or sell your option. For more information, please go to: http://binaryoptionsschool.edublogs.org/