What Is “Counterparty Risk” and How Do Regulated Exchanges Mitigate It?
Counterparty risk is the risk that the other party to a financial transaction will fail to fulfill their contractual obligations. Regulated futures exchanges mitigate this by acting as the central counterparty (CCP) through a clearing house.
The clearing house guarantees the trade, interposing itself between the buyer and seller, and uses margin requirements to cover potential losses.
Glossar
Regulated Futures Exchanges
Venue ⎊ Regulated futures exchanges are trading platforms authorized by financial authorities to list and facilitate the trading of futures contracts.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Regulated Exchanges
Exchange ⎊ Regulated exchanges, within the context of cryptocurrency, options trading, and financial derivatives, represent platforms subject to oversight by governmental or self-regulatory bodies, ensuring adherence to established rules and legal frameworks.
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.
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.