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Central counterparty clearing CCP , also referred to as a central counterparty , is a financial institution that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange , securities , options , and derivative contracts.
CCPs are highly regulated institutions that specialize in managing counterparty credit risk. CCPs "mutualize" share among their members counterparty credit risk in the markets in which they operate. The advantages of a central counterparty clearing arrangement are greater transparency of the risks, reduced processing costs, and greater certainty in cases of default by a member. For example, a trade between member firm A and firm B becomes two trades: This process is called novation.
As the CCP concentrates the risk of settlement failures into itself and is able to isolate the effects of a failure of a market participant, it also needs to be properly managed and well-capitalized  in order to ensure its survival in the event of a significant adverse event, such as a large clearing firm defaulting. Guarantee funds are capitalized with collateral from the member firms. In the event of a settlement failure, the defaulting firm may be declared to be in default and the CCP's default procedures utilized, which may include the orderly liquidation of the defaulting firm's positions and collateral.
In the event of a significant clearing firm failure, the CCP may draw on its guarantee fund in order to settle trades on behalf of the failed clearing firm. Nonetheless, it is possible that, in extreme circumstances, CCPs could be a source of systemic risk. In the wake of the financial crisis of —08 the G20 leaders agreed at the Pittsburg summit that all standardised derivatives contracts should be traded on exchanges or electronic trading platforms and cleared through central counterparties CCPs.
In June , Federal Reserve official Alfred Kohn mentioned that the largest CDS dealers were working on an exchange, and that only regulatory approval rather than legislation would be required.
FXCH acts as the global CCP for exchanges, market makers and lending market participants trading crypto currency contracts with each other. This has acted as a CCP, long before the term was coined. It also has rules to handle the gains and losses from a defaulting broker. The guarantee fund ensures that settlement can be completed. A defaulting member's contribution to the fund, along with any other assets held by the depository, are used to absorb any losses at the time of default.
Its rules stipulate a five-step "waterfall" in dealing with a member's default: In order to access the viability of its funds, the OCC carries out a firm-wide default test annually.
In addition, the firm performs smaller, limited scope defaults throughout the year. Results are reported to its Enterprise Risk Management Committee. Clearnet , the result of a merger between the London Clearing House and Clearnet, acts as a CCP for a wide variety of financial products, from equities and commodities to credit default swaps and interest rate swaps.
Asian countries have addressed the needs of their derivative markets by forming CCPs. From Wikipedia, the free encyclopedia. Retrieved 1 April Bank for International Settlements. Retrieved 2 April Retrieved from " https: Securities finance Financial markets Securities clearing and depository institutions Systemic risk. All articles with unsourced statements Articles with unsourced statements from April Views Read Edit View history.