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What is a 'Central Counterparty Clearing House - CCP'

A central counterparty clearing house (CCP) is an organization that exists in various European countries to help facilitate trading done in European derivatives and equities markets. These clearing houses are often operated by the major banks in the country to provide efficiency and stability to the financial markets in which they operate. CCPs bear most of the credit risk of buyers and sellers when clearing and settling market transactions.

BREAKING DOWN 'Central Counterparty Clearing House - CCP'

A central counterparty clearing house (CCP) is a corporate entity that reduces counterparty, operational, settlement, market, legal and default risk for traders. A CCP becomes the counterparty to the buyer and the seller and guarantees the terms of a trade even if one party defaults on the agreement. The CCP collects enough money from each buyer and seller for covering potential losses incurred by not following through on an agreement, resulting in the entity replacing the trade at the current market price. Monetary requirements are based on each trader’s exposures and open obligations.

Functions of a CCP

A CCP hides traders’ identities from each other as a means of protecting their privacy. The entity also protects trading firms against default from buyers and sellers who are matched by an electronic order book and whose creditworthiness is unknown. In addition, a CCP reduces the number of transactions being settled, which helps operations run more smoothly and reduces the value of obligations being settled, which helps money move more efficiently among traders.

Moody’s Rating Methodology for CCPs

In January 2016, Moody’s Investors Service published its new methodology for rating CCPs worldwide. The Clearing Counterparty Rating (CCR) shows how well Moody’s believes a CCP may meet its clearing and settlement obligations in an efficient manner and how much money is anticipated to be lost if a trader defaults on an obligation. The CCR takes into account the CCP’s management capabilities for obligation defaults and related protections, its business and financial basics, and its operating environment, along with quantitative measurements and qualitative issues that Moody’s uses when determining a CCP’s creditworthiness.

Blockchain Technology and CCPs

Blockchain technology may represent a new frontier for CCP's; in many respects, the distributed ledgers verifying bitcoin transactions already perform many of the same functions as a CCP. In November 2015, the London Stock Exchange (LSE) and its clearinghouse, LCH Clearnet, along with Euroclear, a securities settlement specialist based in Belgium, and CME Group, a leading CCP, met with French bank Societe Generale and Swiss bank UBS to discuss how blockchain technology can change how security trades are cleared, settled and recorded. The group, called the Post Trade Distributed Ledger Working Group, believes utilizing new technology can reduce risk and margin requirements and allow for greater regulatory oversight before and after trading. Because the group’s members represent various parts of the securities settlement process, they have a comprehensive understanding of how the blockchain technology can aid the settlement, clearing and reporting processes.

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  2. Clearing House

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  4. Settlement Period

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  6. Clearing

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