Global Securities Markets: Navigating the World's Exchanges and OTC Markets

CENTRAL COUNTERPARTIES

The answer to the legal problem that arises if one party becomes insolvent before netting or before settlement takes place is the central counterparty. A central counterparty, or CCP, negates this risk by the CCP's becoming the seller to every buyer and the buyer to every seller. Stated another way, each contract among market counterparties is made new again with the CCP. This is called novation. Thus, the CCP becomes liable to each and every trade. The CCP mitigates this risk by calling for margin5 from each participant in the CCP system. Ultimately, the risk of insolvency of any one CCP participant is spread among all participants if the margin and other security obtained by the CCP are exhausted.

1. In fact, it was once a rule that all members of the New York Stock Exchange (NYSE) had to have offices below Chambers Street in New York in order to facilitate delivery of securities. In the 1960s, trading reached such volumes that some firms could simply not keep up and a number of firms failed in the late 1960s and early 1970s, precipitating the Securities Investor Protection Corporation; see Chapter 15. For a vivid account of Wall Street in the 1960s refer to John Brooks, The Go-Go Years: The Drama and Crashing Finale of Wall Street's Bullish 60's (Weybright & Talley 1973), which chronicles the failure in the 1960s of once-storied firms like Hayden, Stone, F.I. du Pont, and Goodbody & Co.

2. The commercial laws that govern the global securities markets fall ...