Central clearing houses play a critical role in reducing counterparty risks in financial markets, including the foreign exchange (Forex) market. A central clearing house acts as a mediator between buyers and sellers, assuming the role of the counterparty to every trade. By doing so, the clearing house eliminates the need for buyers and sellers to directly transact with each other, thereby reducing the counterparty risk.

In Forex trading, a central clearing house operates as a central counterparty (CCP) for all transactions. The CCP ensures that each trade is settled on a timely basis, even if one of the counterparties defaults. To ensure that it can meet its obligations, the CCP typically requires participants to post collateral or margin for each trade. This collateral serves as a buffer against potential losses that may arise from a default by a counterparty.