Regulation of central counterparties

What are central counterparties?

A central counterparty (CCP) is a type of financial institution (also known as a clearing house) which facilitates the clearing of both over-the-counter (OTC) derivatives and exchange-traded derivatives (ETDs).

Each of the counterparties to a derivative contract is exposed to the risk that the other counterparty will fail to meet its obligations under the derivative (counterparty risk). Clearing is a process which eliminates the exposure of the counterparties to counterparty risk. The basic mechanism for doing this is the interposition of a CCP between the original counterparties, so that the original derivative contract is replaced by two separate contracts—one between the CCP and the first counterparty and one between the CCP and the second counterparty. Each original counterparty is then exposed to the risk of the CCP, not to the risk of the other original counterparty.

The CCP in turn needs to protect itself against the credit risk of the