How Does a Central Clearing Counterparty (CCP) Mitigate Settlement Risk?

A CCP steps between the buyer and seller, becoming the counterparty to both sides of the trade through a process called novation. This guarantees the trade's completion even if one of the original parties defaults, effectively mutualizing the risk across its membership.

The CCP maintains a substantial default fund and imposes strict margin requirements to ensure its financial integrity and the stability of the market.