Behind the scenes, CCPs play a key role in the securities and derivatives markets. When two trading parties enter into a securities or derivatives transaction, the CCP positions itself between the buyer and seller. The CPP thus effectively becomes the new counterparty for both buyer and seller – a counterparty specifically designed to manage and mitigate the risks associated with this kind of transactions. In return, the CCP requests collateral from the trading parties (see Figure 1).
Figure 1 - Financial transaction with and without a CCP