How Do Clearing Houses Mitigate Systemic Risk in Standardized Derivatives Trading? ▴ Learn

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.

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