A CCP is an entity that interposes itself between the counterparties to a transaction, becoming the buyer to every seller and the seller to every buyer. What are the benefits of CCP clearing?
First, it allows counterparty risk mitigation and reduces the risk of contagion in case of the failure of a market participant. Counterparty risk mitigation is guaranteed by novation (i.e. the process through which the original bilateral contract is replaced by two contracts between the CCP and each of the original counterparties), by multilateral netting and by robust margining procedures and other risk management controls that render the CCP the most creditworthy counterparty. The risk of contagion is reduced through loss mutualisation: in case of the default of a CCP’s participant, if the collateral provided by the latter is not sufficient to cover the loss, other participants are required to share that loss (up to the value of their contribution to the default fund of the CCP). Second, it has a positive effect on market liquidity. Provided that the CCP clears a sufficient number of asset classes, the usage of a CCP for OTC derivatives may allow a member to free capital for other pu
