![]() For example, a trade between member firm A and firm B becomes two trades: A-CCP and CCP-B. Once a trade has been executed by two counterparties, it is submitted to a clearing house, which then steps between the two original traders' clearing firms and assumes the legal counterparty risk for the trade. ![]() 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 some financial products, members’ net payment obligations to or from the CCP are settled on a daily basis (or more frequently if there are large movements during the course of the day) to prevent the build-up of large exposures. This is done either on a daily basis or sometimes more frequently. If those prices fall, the member must deposit a corresponding amount of cash, and if those prices go up, the member may withdraw a corresponding amount of cash. ![]() Variation margin is the second line of defense against fluctuation in the prices of securities pledged as collateral. For instance, a CCP may increase initial margin requirements in response to high price volatility. CCPs typically adjust initial margin demands in response to changes in market conditions. The first line of defense is collateral provided by the defaulting member. CCPs require a pre-set amount of collateral - referred to as ‘initial margin’ - to be posted to the CCP by each party in a transaction. A CCP reduces the settlement risks by netting offsetting transactions between multiple counterparties, by requiring collateral deposits (also called " margin deposits"), by providing independent valuation of trades and collateral, by monitoring the creditworthiness of the member firms, and in many cases, by providing a guarantee fund that can be used to cover losses that exceed a defaulting member's collateral on deposit. CCPs are highly regulated institutions that specialize in managing counterparty credit risk.ĬCPs "mutualize" (share among their members) counterparty credit risk in the markets in which they operate. A central clearing counterparty ( 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.
0 Comments
Leave a Reply. |