What is a Central Counter Party (CCP)
The role of a CCP is to act as the Buyer to every Seller, and the Seller to every Buyer, for all transactions cleared by the CCP. It guarantees the delivery and payment obligations of all transactions, thereby removing the credit risk that would otherwise exist between buyer and seller. A CCP requires its Clearing Members to provide collateral deposits (known as margins) for all open positions, and undertakes a daily mark-to-market of these open positions. Resulting profits/losses are credited/debited to each Clearing Member, with losses being required to be paid on a daily basis.
CCPs will also establish default funds which are used in the event of the default of a Clearing Member. All Clearing Members, and the CCP itself, contribute to the default fund, and in the event that the losses incurred as a result of the default of a Clearing Member are greater than the total default fund, then Clearing Members and the CCP will be required to make such additional contributions as are necessary to meet the losses incurred.
CCPs regularly assess the margin requirements using a variety of statistical models based upon historical price movements, and assuming stressed-market scenarios. In addition, CCPs have the power to call for additional margin intra-day if the relevant market exhibits significant volatility.