CCP

WHAT IS THIS? A central counterparty (CCP) manages default risk by collecting initial and variation margin from both parties to a trade. Spill-over losses are absorbed via a default fund to which all members contribute – introducing a degree of mutualised risk – and by the CCP’s own capital. The concept is an old one that was extended to over-the-counter derivatives in the aftermath of the financial crisis.

On thin ice

Following the near-collapse of Bear Stearns, even trades conducted with interbank dealers can no longer be considered risk-free. With so much of the derivatives market concentrated in the hands of a few dealers, what would happen if a major counterparty…

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