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

A CCP becomes the counterparty to all trades, absorbing default losses and preventing contagion.
Greeks.Live07.11.25

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

A central clearing house (CCP) mitigates counterparty risk by becoming the buyer to every seller and the seller to every buyer. Once a trade is agreed upon, the CCP steps in as the intermediary, novating the contract.

This breaks the direct link between the original trading parties. If one party defaults, the CCP absorbs the loss, using funds from a default waterfall that includes the defaulting member's collateral and its own capital.

This prevents a single default from causing a cascade of failures throughout the financial system.

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What Is ‘Default Risk’ and How Does the Clearing House Mitigate It?
How Does a Central Counterparty (CCP) Mitigate Counterparty Risk?

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