Variation and Initial Margin Required by Central Counterparty Clearing Houses

John Fennell and Yuting Wei

A CCP is a financial institution that provides clearing and settlement services for trades in various cash markets, and for derivative contracts spanning a variety of asset classes. The CCP stands between counterparties (clearing members or sponsored access clients11Sponsored access clients are an innovation where an institutional client (sponsored member) obtains sponsorship in a CCP from a direct clearing member (sponsoring member) and the sponsored member can take on the CCP directly and post initial margin to it, with the sponsoring member backstopping the sponsored member through the deposit guarantee fund and any assessments that may be applicable within the CCP’s default waterfall.) and transfers the risk the two counterparties have against each other to the CCP through a process called novation.22Novation is the substitution of an original contract with a new contract. When a trade is novated to a CCP, the latter steps in between parties of the trade and becomes a counterparty to both the buyer and the seller of the trade. The original contract between buyer and seller ceases to exist. Novation provides clearing members with the opportunity to substitute and net their

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