What is a CCP?
A CCP is a corporate entity that provides a guarantee to both parties in a trade that if one party defaulted before the discharge of its obligations, the CCP would fulfil the financial obligations to the remaining party as agreed at the time of the trade. A CCP mitigates replacement cost risk or market risk – that is, the risk that the remaining party has to replace the trade at an unfavorable price.
The traditional description of a CCP as a ‘buyer to every seller and seller to every buyer’ is based on the practice of a single CCP clearing for a trading venue. A number of equities trading venues have appointed several CCPs to clear for them concurrently. The term ‘central’ counterparty remains unchanged but it can acquire a new meaning – if a trading firm is able to concentrate all its equities transactions to be cleared by a CCP of its choice, then that CCP is the firm’s “central” counterparty.