Clearing is the process of guaranteeing financial market transactions between the execution of the transaction and its settlement. Technically, clearing is the process of establishing positions, including the calculation of net obligations, and ensuring that financial instruments, cash, or both, are available to secure the exposures arising from those positions. Clearing is performed by Central Counterparties (CCPs), which are financial market infrastructures that interpose themselves between the counterparties to the contracts traded on one or more financial markets, becoming the buyer to every seller and the seller to every buyer. Clearing allows counterparties to trade with each other anonymously without worrying about whether their counterparty will honour the trade. In addition, in the event that a counterparty goes bankrupt, clearing allows the market to continue trading without the bankruptcy spreading to other counterparties.
The main benefits of clearing can therefore be summarised as follows:
- Efficiency – CCP Clearing reduces the obligations between counterparties by netting offsetting positions. This netting process reduces counterparty credit risk and liquidity needs between those clearing members involved in those transactions.
- Risk management – CCP Clearing independently manages the risk of counterparties through risk modelling and ensures there are resources available to absorb potential losses that could result from the default of a clearing member, limiting any potential contagion to other CCP participants.
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CCP Clearing Publications
Sep 2013 Rehlon, A and Nixon, D. – Central counterparties: what are they, why do they matter and how does the Bank supervise them?’, Bank of England Quarterly Bulletin
Mar 2013 Murphy, E and Senior, S – Changes to the Bank of England’, Bank of England Quarterly Bulletin, Vol. 53, No. 1, pages 20–28.
Apr 2012 Committee on Payment and Settlement Systems and International Organization of Securities Commissions – Principles for financial market infrastructures
Jun 2011 Norman, P – The risk controllers: central counterparty clearing in globalised financial markets.
May 2011 Pirrong, C – The economics of central clearing: theory and practice’, ISDA Discussion Paper.
Mar 2010 Committee on the Global Financial System – The role of margin requirements and haircuts in procyclicality, CGFS Paper No. 36.
Mar 2010 Duffie, D and Zhu – Does a central clearing counterparty reduce counterparty risk? Stanford University Working Paper.
Jun 1999 Hills, B, Rule, D, Parkinson, S and Young, C – Central counterparty clearing houses and financial stability, Bank of England Financial Stability Review, pages 122–34.