Clearing houses are always used in futures markets and are increasingly being used in OTC markets. In futures markets, clearing houses, through the exchanges, play a crucial role in ensuring the integrity and smooth functioning of trades. They act as a central counterparty to both sides of a transaction, managing the risk that one party defaults on their contract obligations. In OTC markets, which traditionally have been less regulated and more flexible, there is a growing trend towards using clearing houses, particularly Central Counterparties (CCPs), to enhance the stability and transparency of these markets.

A is incorrect because clearing houses are always used in futures markets, which is a key feature of these markets that enhances their safety and reliability.

B is incorrect because clearing houses are a fundamental part of futures markets and are also increasingly used in OTC markets, contrary to the implication that they are only used in OTC markets.

D is incorrect because, while clearing houses are always used in futures markets, their use in OTC markets, although increasing, is not yet universal.

Things to Remember

• Clearing houses reduce the counterparty risk in futures markets by guaranteeing the performance of both sides of the transaction.
• In OTC markets, the use of clearing houses (especially CCPs) is growing as a means to mitigate systemic risk and increase transparency in these traditionally less-regulated markets.
• Understanding the role of clearing houses is essential for participants in both futures and OTC markets, as it affects the risk profile and operational aspects of trading in these derivatives.