The advantage of a clearing house guarantee is that the clearing house is at the centre of the system and therefore has all the data and information to facilitate this process. A central guarantor also enables risk management and counterparty assessment to be centralised and reduces counterparty risks for market participants. However, there are also disadvantages in having a central guarantor due to the following risks involved:

1. credit risk of a member not paying for securities purchased and the clearing house being unable to recover the securities;

2. credit risk of the clearing house releasing payment before securities have been delivered to it; and

3. position risk arising from the clearing house having to purchase securities in the market to make a delivery.

It may also be imprudent to concentrate such enormous risk on a clearing house unless it can support and manage those risks. A clearing house which acts as a central counterparty may also lead to market participants being less inclined to adopt vigorous standards in assessing the credit quality of their counterparties by entering into transactions with persons who are not financially sound and with whom they would not otherwise trade with directly.

It can be seen from the above arguments that before a guarantee is provided by a clearing house, it must have strong systems and controls, in particular in terms of its risk management capabilities. In the countries where the clearing house acts as the central guarantor, the risk management features typically include participation standards, collateral requirements, minimum capital requirements, loss sharing procedures and operational safeguards.