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.
Understanding a Central Counterparty Clearing House (CCP)
Central counterparty clearing houses (CCPs) perform two primary functions as the intermediary in a transaction: clearing and settlement. As counterparties to the buyers and the sellers, CCPs guarantee the terms of trade—even if one party defaults on the agreement. CCPs bear the lion's share of the buyers' and sellers' credit risk when clearing and settling market transactions.
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 CCP defines what is required from each party in a transaction to reduce counterparty credit risk and guarantee the transaction's settlement, even if one of the parties defaults.
What is settlement?
The CCP oversees the correct and timely transfer of securities and cash between the parties to complete the transaction in the settlement process.
After a transaction has been carried out between two counterparties, it is transferred to a CCP.
The CCP then assumes the counterparty risk for both counterparties to the transaction.
The CCP's responsibilities include risk checking, clearing, settlement, and general market monitoring.