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What does a repo CCP do?

What does a repo CCP do?

CCP is the acronym for central (clearing) counterparty. In exchange-traded markets, they are known as clearing houses. CCPs perform two so-called clearing functions:

  • Once a transaction has been agreed between two parties and registered with a CCP, the CCP inserts itself into the transaction (so that one contract becomes two --- a legal process called novation) or is deemed to be an original party to the transaction (one transaction negotiated between two CCP members does not produce a contract between them but instead automatically generates two contracts, between the CCP and each of the members --- a process called open order). The CCP famously becomes the buyer to every seller and the seller to every buyer. On this basis, if one of the CCP members defaults, the CCP guarantees scheduled settlement for other members.

The CCP will net transactions between members on a centralized basis (netting by a CCP is referred to as ’clearing‘). This means that a delivery of a security sold via the CCP by party A to party B can be netted off against deliveries of the same security on the same date bought via the CCP by party A from party C, thereby reducing A’s exposure. The same applies to cash payments in the same currency. This produces much smaller net exposures than decentralised bilateral netting, in which netting is only between separate pairs of parties. This type of netting is often called multilateral netting.