The following Financial Services guidance note provides comprehensive and up to date legal information covering:
BREXIT: The UK is leaving the EU on Exit Day (as defined in the European Union (Withdrawal) Act 2018). This has an impact on this Practice Note. For guidance, see Practice Note: Brexit—impact on finance transactions—Key issues for derivatives transactions and Brexit—impact on finance transactions—Derivatives and debt capital markets transactions—key SIs.
Clearing is a process which eliminates the normal risk that a party to a derivatives transaction will default (counterparty risk).
The main parties involved in the clearing process are:
a financial institution known as a clearing house, and
other financial institutions, usually banks or brokers, which enter into a clearing agreement with the clearing house—these institutions are known as clearing members of the clearing house or simply clearing firms
In cleared transactions:
all transactions are entered into by clearing members, which may do this for their own accounts or for the accounts of their clients, and
the clearing house interposes itself between the clearing members who have entered into the transaction, becoming a party to every transaction—each party therefore is exposed to the risk of the clearing house but not to the risk of the other party
Clearing members do not need to be concerned with the identity or credit quality of their clearing member counterparties, but only with the credit quality
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