Final answer:
A clearing house acts as an intermediary to manage risk in financial markets and ensures the settlement of trades, particularly managing higher risks with OTC products compared to exchange traded futures. Major stock exchanges include NYSE and Nasdaq, whereas OTC markets handle securities not listed on formal exchanges, such as the OTC Pink Sheets.
Step-by-step explanation:
A clearing house plays a critical role in financial markets, operating as an intermediary between buyers and sellers of financial instruments. Its primary function is to manage the risk that comes with the trading of these instruments. Clearing houses ensure the smooth settlement of trades and work to mitigate default risk. They manage their risks through a process known as margining, requiring traders to deposit a margin as collateral to cover potential losses, and also via a robust system of financial safeguards.
The risks associated with clearing Over-The-Counter (OTC) products are generally higher than those for exchange traded futures. OTC products are not traded on regulated exchanges and are therefore subject to greater counterparty risk. Since these transactions are private, they lack the standardization and transparency of exchange traded products, making them potentially more complex and less liquid. Also, OTC products may have bespoke terms that add to the clearing house's workload in understanding and managing the associated risks.
Two major stock exchanges are the New York Stock Exchange (NYSE) and the Nasdaq. OTC markets, such as the OTC Pink Sheets, involve trading securities not listed on a formal exchange. Comparatively, the Dow Jones Industrial Average and the Standard & Poor's 500 (S&P 500) are indexes representing a segment of the market. A bull market signifies rising prices, whereas a bear market indicates falling prices. Lastly, the difference between a spot and futures market is that spot markets involve immediate delivery, whereas futures markets involve delivery at a future date.