Central Counterparty Clearing House (CCP)
Tue, Apr 15Central counterparty clearing houses (CCPs) are financial entities, typically managed by large banks, established to facilitate trading in derivatives and equities while ensuring efficiency and stability within financial markets.
CCPs carry out two main functions as intermediaries in transactions:
- Clearing
- Settlement
What is clearing?
During the clearing process, the CCP acts as the counterparty to both the buyer and the seller. The CCP specifies the requirements for each party involved in a transaction to mitigate counterparty credit risk and ensure the transaction's settlement, even if one party defaults.
What is settlement?
In the settlement process, the CCP manages the accurate and timely transfer of securities and/or cash between the involved parties to finalize the transaction. Once a transaction occurs between two counterparties, it is forwarded to a CCP. The CCP then takes on the counterparty risk for both parties involved in the transaction.
The responsibilities of the CCP encompass risk assessment, clearing, settlement, and overall market oversight.
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