Understanding the Role of Central Clearing Counterparties in Financial Markets
At its core, a Central Clearing Counterparty serves as a facilitator and guarantor of trades between buyers and sellers in financial markets. When two parties engage in a transaction, the CCP steps in as a central entity, becoming the buyer to every seller and the seller to every buyer. This process, known as novation, effectively replaces the bilateral credit risk between the original counterparties with a single counterparty risk to the CCP.
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