Clearinghouse / Central Counterparty (CCP)

A clearinghouse, or central counterparty (CCP), interposes itself between the two sides of every trade it clears via novation: the original contract is replaced by two contracts, with the CCP as buyer to every seller and seller to every buyer. Once novated, you no longer face your trade counterparty — you face the clearinghouse — which is why exchange-traded futures carry almost no bilateral credit risk.

The CCP guarantees performance through a layered default waterfall: the defaulter's initial margin and its default-fund contribution, then the CCP's own capital ("skin in the game"), then the mutualized default fund of surviving members, and finally unfunded member assessments. If a clearing member defaults, the CCP closes out its book and draws on this waterfall in order. Routine daily variation margin settles mark-to-market gains and losses but is not itself a default-waterfall layer.

Major examples include CME Clearing, ICE Clear, and LCH. By concentrating and netting exposure, a CCP both reduces systemic counterparty risk and becomes a systemically important node itself — which is why post-2008 reform pushed standardized derivatives into central clearing and why CCP risk management is heavily regulated.