Central (Clearing) Counterparty Essay

1489 Words Feb 1st, 2016 6 Pages
OR

BROKER
A member of stock exchange

Stock Exchange

INVESTOR
KNOWN AS
OVER THE COUNTER (OTC)
TRADING

COUNTERPARTY

What’s a Stock Exchange ?
1. Stock trades conducted via centralized place.
2. Examples: NYSE, The Egyptian Exchange, London Stock Exchange…

3. Buy/ Sell is conducted through the exchange; no direct contact between seller & buyer; Exchanges acting as a counterparty to all trades. What’s an OTC?
1. No centralized place where trades are made.
2. Market is made up of all participants in the market trading among themselves. 3. Example FOREX/FX.

Why Stock Exchange and not OTC?
1. Necessarily OTC is not the quickest means to trade. You may have to look for a suitable counterparty on your
…show more content…
If one counterparty fails, the other is protected via the default management procedures and resources of the CCP.
The CCP is AAA-rated, because it strictly collateralises its exposures; is backed by reserves, a default fund and other safeguards; and can ultimately fall back on its members. CCPs therefore provide attractive lowrisk counterparties.

A Complex ‘Web’ of bilateral exposures is reduced to a more simple network via a CCP.

What is the risk that CCP takes care of?
1. A key risk attached to financial market transactions is counterparty credit risk — the risk that one party to a contract defaults and cannot meet its obligations under the contract.
2. In response to the events of 2007–09, the G20 leaders mandated reform of the structure and transparency of OTC derivatives markets. Specifically, in September 2009 the G20 leaders agreed in Pittsburgh that all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through CCPs.

How does CCP reduce the Counterparty
Credit Risk?
Multilateral netting :
CCPs can reduce counterparty credit risk by netting exposures across their members: that is, offsetting an amount due from a member on one transaction against an amount owed to that member on another, to reach a single, smaller net exposure.
When trades are centrally cleared, the original counterparties’ contracts with one

Related Documents