How Do Clearing Houses Mitigate Systemic Risk in Standardized Derivatives Trading?
Clearing houses, or Central Clearing Counterparties (CCPs), mitigate systemic risk by becoming the buyer to every seller and the seller to every buyer. This novation process centralizes counterparty risk.
They enforce strict margin requirements, manage default funds, and standardize contracts, ensuring that the failure of one trading firm does not cascade into a widespread market collapse. This central guarantee provides stability to the derivatives market.
Glossar
Clearing Houses
Settlement ⎊ Clearing houses, within cryptocurrency derivatives, function as central counterparties mitigating counterparty credit risk through novation of trades.
Standardized Derivatives
Valuation ⎊ Standardized derivatives within cryptocurrency markets represent contracts whose terms ⎊ underlying asset, quantity, expiration date ⎊ are predetermined by an exchange, facilitating efficient price discovery and risk transfer.