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central counterparty clearing house (ccp)

A central counterparty clearing house is defined by the Bank for International Settlements as an entity that interposes itself between counterparties to contracts traded in one or more financial markets, becoming the buyer to every seller and the seller to every buyer and thereby ensuring the performance of open contracts.

Unlike currency forward markets, which are fairly unregulated or ‘Over-the-Counter’, currency futures markets depend on an exchange that acts as a central counterparty clearing house to guarantee all trades. This is done in order to attract retail participation in markets and thereby increase liquidity, as no mutual credit checks amongst traders are required. Participants, however, are required to make an initial good-faith deposit on every single position.