FRM: Central counterparty (CCP)

The key advantage of a central counterparty (CCP) is multi-lateral netting. The two key disadvantages of a CCP are (i) some degree of product standardization is required (because collateralization-daily variation margin-requires a common valuation methodology) and (ii) systemic risk is not eliminated because the CCP itself is not the entity that is "too interconnected to fail." For more financial risk videos, visit our website! www.bionicturtle.com

[@bionicturtle]

@DavidAKZ I attached my references to the corresponding entry on our blog (3 papers, mainly, but many articles too). I would link directly but i don't think i can from youtube. My favorite reference is Jon Gregory's book called Counterparty Credit Risk. thanks

[@Mayah862]

You explained this concept so clearly, thanks! What are your thoughts to the Basel 3 accord of use of CCP's?

[@saniamustafa5052]

This really helped with my understanding! great job!

[@bhushanstake3788]

Thank You...Simplified the Neutralizing...

[@DavidAKZ]

@bionicturtledotcom thanks. This is another world. !

[@marchesedesade89]

Thank you a lot for this video, it really helped me understand a bit more about CCP!

[@dariknour6051]

You complicated the thing sir.

[@DavidAKZ]

where do you get this stuff from !?

[@MarinaGalmacci]

thanks. this is a good picture.

[@kagebunshin4380]

Could you explain how multilateral netting works? It's very confusing to me. i get the criticisms of the CCP. But I just don't understand the mechanism of multilateral netting.

[@bionicturtle]

Hi Damon, yes, multilateral netting is non-trivial (you are right to be confused). Please see our PQ 904.2 here at trtl.bz/2UjSZiL which has simple example of three parties: A -> 50 -> B -> 75 -> C -> 60 -> A. Total notional of 370. Via trade compression, we identify the lowest exposure, in this case 50, and subtract it from all three. Then: current A -> 50 -> B is eliminated; current B -> 75 -> C is reduced to B -> (75 - 50 = 25) -> C; and current C -> 60 -> A is reduced to C -> (60 - 50 = 10) -> A. New notional is only 70. Feel free to follow up in our forum at the link!

[@tymoteuszs1614]

Do you say that CCP = Clearing house, or is there a difference?

[@JCDanon]

Every CCP is clearing house, but not every clearing house operates in the CCP model (though, it has became a standard in Europe for example - EMIR regulation imposes a duty to clear all standardized OTC derivatives through a Central Counterparty clearing houses).