CCPs

Central counterparties (CCPs) are financial market infrastructures that interpose themselves between counterparties to trades, becoming the buyer to every seller and the seller to every buyer. By novating contracts, CCPs guarantee performance on both sides of a trade, thereby reducing counterparty credit risk and enabling multilateral netting. They clear trades in various markets, including futures, options, swaps, and some securities transactions, and they typically operate through clearing members and clients.

Key risk management features include margining (initial margin to cover potential future exposure, and variation margin to cover current exposure), default management procedures, and a default fund contributed by member firms. In the event of a member default, the CCP uses margins and default funds, and may use its own capital to cover losses; extreme losses may be allocated to non-defaulting members.

CCPs are subject to regulation and oversight to ensure financial stability. In the United States, oversight by the Commodity Futures Trading Commission and the Federal Reserve regulates futures and swaps clearing; in the European Union, EMIR governs CCPs and requires clearing of standardized OTC derivatives and robust risk controls; national authorities supervise clearing members and CCPs. Post-crisis reforms aim to increase resilience through higher capital, stress testing, and cross-border cooperation.

While CCPs reduce bilateral counterparty risk and enable netting, they concentrate risk within a single institution, creating potential systemic risk if a CCP experiences extreme losses or liquidity strain. This has led to requirements for robust governance, liquidity resources, and recovery and resolution plans. Notable CCPs include CME Clearing, LCH, Eurex Clearing, and ICE Clear.