Central counterparty

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A central counterparty ( English central counterparty , hence the abbreviation "CCP" and the unfortunate translation used in EU German Central Counterparty ) is a legal entity in finance that acts as a contractual partner between seller and buyer and serves as a contractual partner for each of the two.

General

The purpose of engaging a central counterparty lies in the possibility of anonymizing trading as well as increasing offsetting options by bundling purchases and sales. The institution of the central counterparty is common in on-exchange and over-the-counter securities and derivatives trading, where it is largely required by law. The main function of the central counterparty is to avoid the counterparty default risk that both contractual partners ( counterparties ) would have without the involvement of a central counterparty.

The central counterparty is the buyer for every seller and seller for every buyer. The processes in which the Central Counterparty enters into the contract are " Open Offer " (immediate entry during the trade) and " Novation " (replacement of a transaction between two participants by two transactions with the Central Counterparty).

backgrounds

First of all, the establishment of an anonymous middle point complicates the trading relationship , because one transaction in the economic sense becomes two transactions in the legal sense. However, the split serves both to anonymize trading and to make offsetting more efficient, and centralization makes it easier for regulators to regulate and monitor the relevant trading activities.

The anonymization of trading is guaranteed by the fact that, for example in securities trading, the buyer cannot trace who the previous owner of the securities was, since his contractual partner is only the central counterparty. Nor can the seller see who bought the securities.

The maximum offsetting efficiency ( netting efficiency ) arises when all trading participants only have a contractual relationship with one central counterparty who can offset all transactions.

The Central Counterparty Interest Group claims that the Central Counterparties also make a decisive contribution to risk prevention. This is justified with the reduction of the performance risk , since the central counterparties demand a security deposit from the trading partners, which should enable a replacement in the event of failure of one of the contractual partners. The calculation of the security deposit is based on the volatility of the security and the possible price change. The Risk Based Margining (RBM) or Standard Portfolio Analysis of Risk (SPAN) used in Germany serve as procedures . The argument of the interest group is not very valid, however, since the decisive risk reduction can also be achieved without a central counterparty, in that if a central counterparty does not participate, bilateral clearing with mutual security deposit between the contractual partners is also prescribed.

Since each trading participant only has the central counterparty as a contractual partner, the counterparty risk ( Herstatt risk ) is reduced - assuming that the central counterparty is fail-safe - and individual assessments and credit lines for counterparties are no longer necessary. Since the trading participants deposit collateral with the central counterparty, the latter is given a good credit rating .

example

Trader B buys 10 quotas of flour from trader A and also sells 10 quotas of flour to trader C. For settlement without a Central Counterparty, the flour must first be delivered from trader A to B, and then from trader B to C.

If a central counterparty is involved, there is also a buying and selling obligation for trader B. However, he has both obligations towards the central counterparty, who ensures the mutual cancellation of the two obligations. The actual delivery of the flour takes place - mediated by the Central Counterparty - from trader A to trader C.

history

Central counterparties now exist on stock exchanges in the USA as well as in Europe. On the Frankfurt Stock Exchange since 27 March 2003 meets the Eurex Clearing AG, a subsidiary of the German stock exchange AG , the task of the central counterparty for all via the electronic trading system Xetra and traded on the Frankfurt stock exchange shares . Since then, Eurex Clearing AG has expanded this task to include Exchange Traded Funds , Eurex Repos and Eurex Bonds . The system of Continuous Linked Settlement has existed for foreign exchange and certain derivative transactions since 2002 .

In 2006 the European Commodity Clearing AG (ECC), a central counterparty for energy-related transactions, was created by hiving off the clearing business of the European Energy Exchange AG (EEX) into an independent company. To this day, ECC assumes this role in both on-exchange and over-the-counter transactions and cooperates with 6 partner exchanges across Europe, 14 clearing members and more than 300 non-clearing members worldwide.

The derivatives exchange Eurex has the Eurex Clearing AG as a central counterparty.

See also

literature

  • Kunz, Jens Henrik: Selected legal problems of the central counterparty. With special consideration of the clearing system at the Frankfurt Stock Exchange , Peter Lang Verlag Frankfurt 2009, series: Stock exchange and capital market law treatises, Volume 3, ISBN 978-3-631-56579-7 .
  • Rinker, Mike: Conclusion of a contract in the electronic trading system , Erich Schmidt Verlag, Berlin 2003, series Basics and Practice of Banking and Stock Exchange, Volume 42, ISBN 3-503-07042-7 .
  • Andre Alfes: Central Counterparty - Central Counterparty - Central Counterparty; Via the conclusion of a contract on the Frankfurt Stock Exchange using the electronic trading system Xetra with the involvement of a central counterparty. Duncker & Humblot, Berlin 2005, series: Studies on savings, giro and credit systems, Dept. B: Law, Volume 167, ISBN 3-428-11993-2
  • Hall, Peter von: Insolvency settlement in bilateral clearing systems - The termination and settlement of transactions with postponed fulfillment time according to German and international insolvency law, taking into account the introduction of central contracting parties on stock exchanges , Nomos, Baden-Baden 2011, series: Schriften zum Insolvenzrecht, Volume 43, ISBN 978-3-8329-6428-3 .

Individual evidence

  1. ↑ Central Counterparty for Equities (CCP). Deutsche Börse, archived from the original on August 21, 2008 ; accessed on August 29, 2019 .
  2. ↑ Derivatives clearing, central counterparties and novation (PDF; 443 kB)
  3. ↑ EACH - European Association of CCP Clearing Houses: Functional Definition of a Central Counterparty Clearing House (PDF; 78 kB)
  4. ↑ Eurex: Clearing. Risk-Based Margining. Archived from the original on November 23, 2008 ; accessed on August 29, 2019 .
  5. ^ SPAN homepage of the Chicago Mercantile Exchange
  6. ↑ http://www.wjammer.com/jac/handbook/chapter11.pdf
  7. ↑ Product information. SPAN. In: NYSE Euronext, LCH.Clearnet. Archived from the original on April 28, 2010 ; accessed on August 29, 2019 .
  8. ↑ International Monetary Fund (2009): Counterparty Risk, Impact on Collateral Flows, and Role for Central Counterparties (PDF; 1.0 MB)
  9. ↑ Exchange rules for Eurex Deutschland. (PDF; 759 kB) April 2, 2018, accessed June 15, 2018 .