Central Counterparty Clearing House (CCP)

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Context

• The European Securities and Markets Authority (ESMA) has derecognised six Indian central counterparties (CCPs) from April 30, 2023.

Note: ESMA is European Union (EU’s) financial markets regulator and supervisor.

Central Counterparty Clearing House (CCP)

About

• A central counterparty (CCP), also known as a central counterparty clearing house, aids the process of financial transactions by acting as an intermediary during a trade.

Operation

• Central counterparty clearing house (CCP) is operated by banks in each country and helps to facilitate the trading.

Role in Financial Market

• Central counterparty clearing houses mainly work towards establishing efficiency and stability in the financial markets.

Benefit to Traders

• Traders are benefited by the central counterparty clearing house or CCP as it reduces the risks related to the counterparty and other risks like operational, settlement, market and legal risks.

Main Functions

• The main functions performed by the central counterparty clearing house or CCP are clearing and settlement.
• It acts as a counterparty for both buyers and sellers acting as an intermediary in their transactions.

Working

• The Central counterparty collects money from both the buyers and sellers, which helps the CCP to guarantee terms of the trade that takes place between both these parties.
• The central Counterparty clearing house or CCP hides the identities of the traders as a means of maintaining privacy and it also protects trading firms from buyers and sellers whose credit worth is unknown and who have been defaulters before.
• This is achieved by the electronic order book which is maintained by the central counterparty clearing house or CCP. CCP is important for running trading operations smoothly and reducing obligations which makes the flow of money easier.

Significance

• The Counterparty Clearing house or CCP is important in the trading world as it collects money from both the trading parties including the buyers and sellers which ensures that both parties will follow through the said agreement.
• The money collected is enough to cover the potential losses in case any party fails to follow through the contract.
• Therefore, Central Counterparty Clearing house or CCP is an important factor in the trading industry, which helps to determine and guarantee the terms of the trade even if one of the trading parties which includes the buyers and the sellers, fails to follow through with the initial contract or agreement made between them.

PRACTICE QUESTION Q. Central Counterparty Clearing house or CCP is an important factor in the trading industry. Throw light on the role it plays in Financial Market.

 

https://indianexpress.com/article/explained/explained-economics/derecognition-six-indian-central-counterparties-by-esma-8588951/