Central counterparty clearing houses (CCPs) are financial organizations, often operated by major banks, created with the objective of easing trading in derivatives and equities and guaranteeing efficiency and stability in financial markets.
CCPs perform two primary functions as the intermediary in a transaction:
What is clearing?
In the clearing process, the CCP becomes the counterparty to the buyer and the seller.
The central counterparty clearing house defines what is required from each party in a transaction to reduce counterparty credit risk and to guarantee the settlement of the transaction, even if one of the parties defaults.
What is settlement?
In the settlement process, the CCP oversees the correct and timely transfer of securities and/or cash between the parties to complete the transaction. After a transaction has been carried out between two counterparties, it is transferred to a CCP.
The Central Counterparty Clearing House then assumes the counterparty risk for both counterparties to the transaction. CCP’s responsibilities include risk checking, clearing, settlement, and general market monitoring.
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