6.1 Central Counterparty Clearing (CCP)

A Central Counterparty (CCP) interposes itself between counterparties to a trade, becoming the buyer to every seller and the seller to every buyer. This is known as novation .

Key CCP Functions

  • Risk Management: Collects margin (initial and variation margin)

  • Multilateral Netting: Compresses numerous gross transactions into net positions

  • Default Management: Manages member defaults through default waterfall

  • Trade Guarantee: Guarantees performance of trades

Major CCPs

US:

  • DTCC (Depository Trust & Clearing Corporation)

  • NSCC (National Securities Clearing Corporation)

  • CME Clearing

Europe:

  • LCH.Clearnet (UK/France)

  • Euroclear (Belgium)

  • Clearstream (Germany)

  • SIX x-clear (Switzerland)

Interoperability

Interoperability is an arrangement between two or more CCPs that involves cross-system execution of transactions. This allows trading members to execute trades with one another on the same trading venue while choosing to clear through different CCPs .

Structural Models:

  • Full Interoperability: Multiple CCPs interconnected

  • Preferred Clearing: Intermediate model with some flexibility

  • Vertical Silo: Single CCP per venue

Regulatory Framework (Europe): EMIR defines interoperability requirements; MiFID II/MiFIR introduced open access provisions. EMIR 3 (anticipated) will address transparency issues with interoperable CCP margin requirements .

6.2 Central Securities Depositories (CSDs)

Central Securities Depositories (CSDs) hold and administer securities, enabling settlement of securities transactions .

Key Functions

  • Securities Custody: Holding securities in book-entry form

  • Settlement: Transferring securities ownership

  • Asset Servicing: Coupon payments, corporate actions

  • Registry Maintenance: Recording ownership

Major CSDs

US:

  • DTC (Depository Trust Company)

Europe:

  • Euroclear (multiple jurisdictions)

  • Clearstream (Germany, Luxembourg)

  • Various national CSDs

Settlement Models in Securities

CCP-Cleared Settlement (On-Venue) : Trades on regulated venues routed to CCP for clearing, then settled via CSD. Under this model, numerous gross transactions are compressed into a single net instruction per ISIN .

Bilateral Settlement: Trades executed off-venue (Systematic Internalisers, OTC) settle directly between buyer and seller on a gross basis via SWIFT messaging .

Prime Brokerage Settlement: Buy-side firms separate execution and settlement—Executing Brokers handle trade execution while Prime Brokers manage settlement, financing, and custody .

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