Central counterparty clearing house

"By and large, derivatives are traded in OTC markets, where dealers trade bilaterally with each other and with clients. If those market participants do not use a central counterparty (CCP), this exposes both parties to bilateral counterparty credit risk, in particular when derivatives positions are held over long maturities. These exposures are significant: the aggregate credit exposure related to derivative holdings for the top five US banks has been estimated to be over US$1 trillion. Transparency in these markets is generally low, so it is difficult to know the exact nature of counterparty credit exposures at both the individual and the global level. During the 2007–09 financial crisis, lack of transparency, combined with increased concerns about counterparty credit risk led to a significant reduction in liquidity."

- "Thoughts on determining central clearing eligibility of OTC derivatives" Bank of England Financial Stability Paper no. 14 - March 2012 Template:CCPboilerplate