What is central counterparty clearing?
Central counterparty clearing describes the process whereby financial trades are cleared by a third-party organisation, whether an exchange or a dedicated clearing house. The central counterparty becomes, in effect, both the buyer and the seller for the period it takes the trade to clear.
Where have you heard about central counterparty clearing?
As an investor, you may well be aware that the financial crisis has prompted increased interest in strengthening existing central counterparty clearing arrangements and establishing new ones, in order to make the system safer. Your financial adviser may refer to central counterparty clearing.
What you need to know about central counterparty clearing.
Central counterparty clearing replaces the one-to-one settlement of a sale and purchase common in most markets, whether those for cars or real estate, by inserting a central counterparty between buyer and seller. The central counterparty assumes the obligations of the two parties involved and guarantees the trade. That means that if one side defaults, the central counterparty will complete the deal. Usually, the central counterparty funds such operations with a levy on all those using its services. By standing behind each trade, the central counterparty contributes to the stability of the financial system.