Definition
Central Counterparty (CCP)
A central counterparty is an institution that interposes itself between the two sides of a trade, becoming buyer to the seller and seller to the buyer, thereby guaranteeing performance and concentrating risk management.
India's clearing corporations, NSCCL and ICCL, function as CCPs for the equity and derivatives markets, while CCIL serves the bond and forex segments. By novating every trade, the CCP ensures that the failure of one counterparty does not directly harm the other, since the CCP stands behind both legs.
A CCP manages this risk through margining, the settlement guarantee fund, a default waterfall and rigorous member eligibility. Because it concentrates risk, a CCP must be exceptionally well-capitalised and supervised; SEBI and RBI regulate India's CCPs as critical financial market infrastructure.
Related terms
- Clearing CorporationA clearing corporation is the entity that clears and settles trades on an exchange, becoming the buyer to every seller and the seller to every buyer through novation, and guaranteeing settlement.
- NovationNovation is the legal process by which the clearing corporation replaces a single trade between two members with two new trades, becoming the counterparty to each side and assuming the settlement obligation.
- NettingNetting is the offsetting of a member's buy and sell obligations in the same security and settlement so that only the net quantity of shares and net amount of money change hands.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.