Central CounterpartyCCP
A central counterparty (CCP), or clearing house, sits between the two sides of a trade so each side deals with the CCP instead of each other — a step called novation. It collects margin from its members so one default does not spread through the market.
When you buy a futures contract you never meet the seller, and you don't need to trust them either. A central counterparty sits in the middle of the trade and guarantees it, which is why one firm's failure does not automatically become yours.
- Category
- Accounting, Tax and Operations
- Reading time
- 4 min
- Also called
- Clearing house, CCP, Central clearing counterparty
- Updated
A central counterparty in plain words
Once a trade is cleared, the CCP takes over both sides — it buys from the seller and sells to the buyer — and stands behind the open contracts.1
The original contract between the two traders is replaced, or novated, by two equal and opposite contracts with the CCP.2
CCPs manage the resulting credit risk partly by taking collateral, or margin.2
How central clearing works, step by step
Trade is agreed
Buyer and seller agree a trade on an Exchange or bilaterally.
Novation
The contract is replaced by two contracts with the CCP.2
Netting
Multilateral netting simplifies exposures compared with a web of bilateral trades.2
Margin is collected
Members post collateral to cover credit risk.2
Default fund backs it
A clearing fund covers price moves beyond margin if a member defaults.1
Regulation
In the US a derivatives clearing organization must register with the CFTC.3
Worked examples
Example 1 — Netting
Payments cut by 60%Hypothetically, Bank A owes B £5m, B owes C £4m, and C owes A £1m on the same contract day. Net positions through a CCP: A −£4m, B +£1m, C +£3m.
| Gross payments | £5m + £4m + £1m = £10m |
| Net payments | £4m (A pays; B and C receive £1m + £3m) |
With central clearing and net settlement, many obligations collapse into far fewer payments — the Bank of England's example shrinks to a single net payment of £2 million.2
Example 2 — Margin covering a default
$15,000 drawn from the fundA hypothetical member posts $80,000 margin; it defaults with a $95,000 loss on its positions.
| Loss | $95,000 |
| Covered by margin | $80,000 |
| Shortfall to default fund | $95,000 − $80,000 = $15,000 |
A clearing fund insures against price moves not covered by margin when a member defaults.1
Example 3 — Who is your counterparty?
One trusted counterpartyA hypothetical trader buys 1 contract from another trader; after clearing, each faces the CCP.
| Before clearing | Buyer ↔ Seller |
| After clearing | Buyer ↔ CCP ↔ Seller |
The CCP becomes buyer to every seller and seller to every buyer.1
Centrally cleared vs bilateral trade
| Aspect | Centrally cleared | Bilateral |
|---|---|---|
| Your counterparty | The CCP | The original trader |
| Netting | Multilateral | Pair by pair |
| Margin | Standardised, set by CCP | Negotiated |
| Main risk | Concentrated in the CCP | Spread across many links |
Where CCPs are used
Futures
Exchange-traded Futures Contract are cleared centrally.
Options
Listed Options use a clearing house.
OTC derivatives
Standardised swaps are cleared under post-crisis rules.
Cash securities
Stock trades are cleared before Settlement.
Advantages and disadvantages
Advantages
- Removes direct exposure to the other trader.
- Netting shrinks the number of payments.
- Margin and default funds absorb losses.
- Standard rules make positions easier to transfer.
Disadvantages
- CCPs become crucial nodes, concentrating risk.
- Margin calls can drain liquidity in stress.
- Members share losses through the default fund.
- Clearing adds fees and operational steps.
Going deeper
Read as far as you need. Each level builds on the one before it.
The middleman that guarantees
Beginner
A CCP interposes itself between counterparties and guarantees open contracts.1
Novation and netting
Intermediate
Novation replaces the original contract, and multilateral netting simplifies outstanding exposures.2
Systemic importance
Advanced
CCPs are exposed to counterparty defaults and have become crucial nodes in the financial network, all the more as OTC derivatives clearing became mandatory after G20 commitments.2
Common mistakes
Thinking risk disappears
Counterparty risk is moved to the CCP, not removed.
Ignoring margin calls
CCP margin can rise sharply in volatile markets.
Confusing CCP and exchange
Trading venue and clearing house are often different entities.
Assuming broker failure is covered
A CCP guarantees members; your protection depends on your broker's arrangements.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A CCP becomes buyer to every seller and seller to every buyer.
- Novation replaces the original contract.
- Netting cuts payments and exposures.
- Margin and default funds absorb defaults.
- Risk is concentrated in the CCP itself.
Frequently asked questions
Is a clearing house the same as an exchange?
Can a CCP fail?
Do retail traders deal with the CCP directly?
Further learning
- Counterparty Risk
The risk a CCP is built to manage.
- Margin
The collateral CCPs collect.
- Settlement
What happens after clearing.
- Futures Contract
The classic centrally cleared product.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- European Central Bank. Glossary (C) (opens in a new tab) Checked .
- Bank of England. Central counterparties: what are they, why do they matter and how does the Bank supervise them? (Quarterly Bulletin 2013 Q2) (opens in a new tab) Checked .
- CFTC. Clearing Organizations (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.