Clearing house and central counterparty (CCP)

Abstract

Each commodity exchange has a clearinghouse, which plays the role of the central counterparty (CCP) for each side of the trade (buyer and seller). The clearinghouse can either be internal to the exchange or be an external central counterparty serving many marketplaces. An exchange clearinghouse is an intermediary between buyers and sellers in the exchange trading. As an intermediary, or central counterparty, to every trade, the clearinghouse acts as the buyer for every seller and the seller for every buyer for every trade. By acting as the central counterparty for every trade, the clearing house helps mitigate counterparty risk. Traders do not have to worry about the other end of their trades falling through, because the clearinghouse is always on the other end. This chapter reviews the different concepts related to clearing houses and central counterparties (CCPs): novation; margin and mark-to-market; default fund; collateral management; clearing members; risk management. The chapter provides illustrative case studies of selected existing clearing houses and CCPs practices. It also summarises the CCP risk management best practices outlined by the International Swaps and Derivatives Association (ISDA)