Derivatives Clearing and Settlement: A Comparison of Central Counterparties and Alternative Structures

Abstract

Most exchange-traded and some over-the-counter (OTC) derivatives are cleared and settled through clearinghouses that function as central counterparties (CCPs). Most OTC derivatives are settled bilaterally. This article discusses how these alternative mechanisms affect the functioning of derivatives markets and describes some of the advantages and disadvantages of each.

Keywords: central counterparty, CCP, clearing and settlement, risk management, Central Banks and Their Policies, Information and Market Efficiency, Event Studies, Government Policy and Regulation, Regulated Industries and Administrative Law, Transactional Relation