How Does a ‘Central Clearing House’ Mitigate Counterparty Risk?

A central clearing house (CCH) acts as an intermediary between two parties in a trade, becoming the buyer to every seller and the seller to every buyer. It guarantees the trade's settlement even if one party defaults.

By interposing itself, the CCH mutualizes the risk and requires both parties to post margin, significantly reducing the counterparty exposure for both sides.