Risk
Management

Introduction to a Central Counterparty (CCP)

The Central Counterparties (CCPs), also called Clearing Houses, arise as “appendices” of Futures during the 19th Century with the large-scale development of commodities markets.

In those markets, there are many risks of different natures (for example, seasonality, bad harvests, storage, etc.) and that is why the Futures Markets where created, in order to provide security to both producers and buyers.

To find the ancestors of the current derivatives exchanges, we have to travel to Chicago on 1848, year in which the Chicago Board of Trade (CBOT) was born, where mostly agricultural products were traded, as wheat, corn, soy and many others, that were the underlyings of its first futures contracts.

Derivatives are good instruments in order to manage market (price) risk, as they fix today the buy/sell price in a future date.

However, there are many other risks, among them, the counterparty or credit risk, i.e. the risk of default of one of the two counterparties in a transaction.

Therefore, derivatives exchanges began to take over the obligations of any of the counterparties in a transaction, in case any of them defaults.

Derivatives exchanges added then a new function, that is to ensure that each and all the trades traded on the market are completed successfully.

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