How Does a Central Counterparty (CCP) Mitigate Systemic Risk?
A CCP becomes the buyer to every seller and the seller to every buyer, legally interposing itself in all trades. This novation process reduces counterparty credit risk for market participants.
It also uses robust risk management, including margin requirements and a default waterfall, to absorb losses and prevent a single failure from spreading across the financial system.
Glossar
Counterparty Credit Risk
Exposure ⎊ Counterparty credit risk in cryptocurrency derivatives arises from the potential for a participant to default on contractual obligations, impacting net market value.
Central Counterparty
Framework ⎊ The concept of a Central Counterparty (CCP) within cryptocurrency derivatives, options trading, and broader financial derivatives represents a critical infrastructural element designed to mitigate systemic risk.