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.
Glossar
Central Clearing House
Mitigation ⎊ Central clearing houses, within cryptocurrency derivatives and broader financial markets, function as intermediaries designed to reduce systemic risk by mutualizing credit exposures.
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.
Central Clearing
Mitigation ⎊ Central clearing, within cryptocurrency derivatives and options, functions as a financial intermediary establishing itself between counterparties to reduce systemic risk.