How Does Mandatory Clearing of Swaps Reduce Systemic Risk? ⎊ Path

How Does Mandatory Clearing of Swaps Reduce Systemic Risk?

Mandatory clearing requires all security-based swaps to be processed through a central counterparty (CCP). The CCP steps in as the buyer to every seller and the seller to every buyer, guaranteeing the performance of the trade.

This significantly reduces counterparty risk between the original trading parties. By concentrating and managing risk centrally, the CCP ensures that the failure of one market participant does not trigger a cascading failure across the entire financial system (systemic risk).

Why Is Counterparty Risk Lower in Exchange-Traded Futures?

What Role Does a Central Counterparty Clearing House (CCP) Play in Ensuring DVP?

What Is the Function of a Clearing House in a Traditional Options Exchange?

What Role Do Clearing Houses Play in Mitigating Counterparty Risk for Traditional Derivatives?

What Is the Role of a Central Counterparty Clearing House (CCP) in Mitigating Counterparty Risk?

What Is the Difference between a Central Counterparty (CCP) and a Central Depository?

What Is the Primary Function of a Clearing House in the Financial Derivatives Market?

What Is the Primary Role of a Clearing House in Futures Trading?

Glossar

Mandatory Clearing

Mitigation ⎊ Mandatory clearing, within cryptocurrency derivatives, functions as a risk mitigation protocol designed to reduce systemic risk by interposing a central counterparty (CCP).