CCP Risk Assessments

Overview

A buyer to every seller and a seller to every buyer is the sub heading that generally follows the term central counterparty clearing house.

A CCP, in short, guarantees a transaction on behalf of both parties. If party A is selling securities to party B, it will first hand the securities over to the CPP. The CCP will then hand the securities to party B.

At the same time, party B will hand over the necessary funds to the CCP. The CCP then will then hand the funds over to party A.

The CCP guarantees that party A will receive the necessary funds to complete the transaction and that party B receives the necessary securities. CCPs also operate in OTC derivatives contracts and any other market transactions that are subject to mandatory clearing.

A CCP is also useful as it ensures anonymity in a trade. Party A and party B may not necessarily like nor trust one another. The counterparty risk in this situation is removed and the burden is taken by the CCP.

If either party defaults on their obligation as part of the transaction, the CCP will step in to make sure everything is in place for the transaction to proceed. So, for example, if party A fails to deliver the securities, the CCP will step in and find them to deliver to party B. Party B will be none the wiser as to the default.

The CCP uses its guarantee fund to step in in cases of collateral shortfall in a trade. The guarantee fund is made up of collateral taken from the CCP’s participants to guarantee against a default.

The most popular model if a participant becomes insolvent is defaulter pays, survivor pays. This means that any shortfall not made up by the defaulter’s contribution to the guarantee fund is made up of the contributions from the other participants in the CCP.

There are various means testing to ensure that there is sufficient collateral in the guarantee fund to keep a CCP solvent.

Thomas Murray can help custodians to assess the risk of a CCP.

Thomas Murray Data Services CCP Risk Assessments

Thomas Murray Data Services on the back of industry demand from GCMs, investment banks, global custodians and other interested parties has rolled out a programme to assess CCPs. This service mirrors its existing CSD Risk Assessments and Capital Market Infrastructure Risk Assessments activities (operational for over 10 years).

The CCP Risk Assessments service is a global program that defines key criteria and related data against which each CCP is assessed. The output provides participants with an assessment, supporting validated data and on-going surveillance as to a CCP's effectiveness in eliminating risks associated with transactions processed by it.

The objective of the service is to bring transparency to the industry for the benefit of participants and offer cost savings to groups required to perform due diligence and assessments on CCPs that they use. This has becomes increasingly critical as the industry is mandated to use CCPs when transacting in cash, exchanged traded and OTC derivative products.


If you would like to purchase this service, or find out more about it, please contact Derek Duggan at dduggan@ds.thomasmurray.com or telephone him on +44 (0) 20 8600 2300.