Central counterparty clearing, also called central clearing, is the activity carried out by a central counterparty (CCP): after two parties agree a trade, the clearing house becomes the buyer to the seller and the seller to the buyer, and guarantees that each side will be paid or receive delivery even if the other fails. The legal step by which the original contract is replaced with two new ones is novation.
The term describes the process, while the main entry describes the institution, its ownership and its regulation. In outline, each clearing member posts initial margin against possible losses on its positions and pays or receives variation margin as prices move. Members also contribute to a default fund that absorbs losses beyond a defaulter's own resources. Offsetting positions are netted, which reduces the amounts to be settled.
Central clearing is standard for exchange-traded futures, options and shares, and since the reforms that followed the 2008 financial crisis it has been mandatory for many standardised swaps; these are discussed under cleared derivatives. Trades that stay outside a clearing house are settled and collateralised bilaterally.