What Is the Role of a Clearing House in Managing Counterparty Risk?

A Clearing House acts as a central counterparty (CCP) in a derivatives transaction, interposing itself between the buyer and seller. It guarantees the performance of the contract, effectively substituting the credit risk of the original counterparty with its own.

This is achieved through margining, collateral management, and a default fund, significantly reducing systemic counterparty risk.