Explain the Difference between Bilateral and Centrally Cleared Derivatives ⎊ Path

Explain the Difference between Bilateral and Centrally Cleared Derivatives.

Bilateral derivatives are traded and settled directly between two counterparties without an intermediary, meaning both parties face each other's credit risk. Centrally cleared derivatives involve a CCP, which steps in as the counterparty to both sides through novation.

This standardizes the contract and mutualizes the risk, making the trade less risky for the individual participants.

What Is the Primary Difference between a Central Counterparty (CCP) and an Over-the-Counter (OTC) Market?

Are All CDS Contracts Required to Be Centrally Cleared?

What Are the Risks of Using Bilateral (Non-Cleared) Derivatives Compared to Centrally Cleared Ones?

What Is the Difference between a Clearing Member and a Non-Clearing Member in a CCP Structure?

How Does Netting Contribute to Reducing Overall Credit Exposure for a CCP?

Does Novation Apply to All Derivatives Cleared through a CCP?

What Is the Role of the Central Clearing Counterparty (CCP) in Reducing Systemic Risk in Derivatives Trading?

What Is the Primary Difference between OTC and Exchange-Traded Derivatives?

Glossar

Centrally Cleared

Clearing ⎊ Centrally cleared refers to the process where a central counterparty (CCP) interposes itself between the buyer and seller of a financial instrument, guaranteeing the performance of the trade.

Centrally Cleared Derivatives

Derivatives ⎊ Centrally cleared derivatives represent a paradigm shift in financial risk management, particularly gaining traction within the cryptocurrency and options trading landscapes.