How Do Central Clearing Counterparties (CCPs) Manage the Systemic Risks Associated with Cross-Margining?
Central clearing counterparties (CCPs) act as the buyer to every seller and the seller to every buyer, placing themselves in the middle of trades. They manage cross-margining risks by enforcing strict collateral standards and maintaining a default fund.
If a large clearing member defaults, the CCP first uses the defaulter's margin, then contributes its own capital, and finally draws from the default fund contributed by all members. This multi-layered defense system mutualizes the risk, preventing the failure of a single large entity from causing a systemic contagion and a market-wide death spiral.
Glossar
Systemic Risks
Contagion ⎊ Systemic risks within cryptocurrency, options, and derivatives manifest prominently through contagion, representing the rapid dissemination of shocks across interconnected market participants.
Central Clearing Counterparties
Mitigation ⎊ Central Clearing Counterparties (CCPs) within cryptocurrency derivatives function as financial intermediaries, interposing themselves between counterparties to reduce systemic risk inherent in bilateral trading.
Counterparties
Agreement ⎊ In cryptocurrency derivatives and options trading, counterparties represent the parties entering into a contractual arrangement, fundamentally defining the risk exposure and potential rewards for each participant.