A clearing member is a firm that is a direct participant of a central counterparty (CCP) and is responsible for meeting the obligations arising from the trades it clears, for itself and for its clients. It posts margin and contributes to the CCP default fund; clients access clearing through it.
CCP (Central counterparty)A central counterparty (CCP) is an entity that interposes itself between the parties to trades in one or more markets, becoming the buyer to every seller and the seller to every buyer. It manages counterparty risk through membership rules, margin, a default fund and a default waterfall, and in the EU is authorised under the European Market Infrastructure Regulation (EMIR).
Default fundA default fund, or guarantee fund, is a pool of resources that clearing members contribute to a central counterparty to cover losses from a member default beyond the defaulter's own margin and contribution. Under the European Market Infrastructure Regulation (EMIR) it must cover the default of the largest member, or of the second and third largest if larger, in extreme but plausible conditions.
Initial margin (IM)Initial margin (IM) is collateral collected to cover the potential future loss on a portfolio if a counterparty defaults, over the time needed to close out or replace the positions. Central counterparties collect it from clearing members; for uncleared derivatives, covered firms exchange it two-way and keep it segregated.
Clearing obligationThe clearing obligation is the duty under the European Market Infrastructure Regulation (EMIR) for financial counterparties, and non-financial ones above clearing thresholds, to clear certain classes of over-the-counter (OTC) derivatives through a central counterparty. Classes in scope include the main interest rate swaps in major currencies and some index credit default swaps.
CCP (Central counterparty)A central counterparty (CCP) is an entity that interposes itself between the parties to trades in one or more markets, becoming the buyer to every seller and the seller to every buyer. It manages counterparty risk through membership rules, margin, a default fund and a default waterfall, and in the EU is authorised under the European Market Infrastructure Regulation (EMIR).
Default fundA default fund, or guarantee fund, is a pool of resources that clearing members contribute to a central counterparty to cover losses from a member default beyond the defaulter's own margin and contribution. Under the European Market Infrastructure Regulation (EMIR) it must cover the default of the largest member, or of the second and third largest if larger, in extreme but plausible conditions.