Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets, 2nd Edition

7.2 Logistics of Central Clearing

7.2.1 Clearing Members

From the point of view of trading through a CCP, one can consider three types of participant:

• General clearing member (GCM) – a member of the CCP who is able to clear third parties as well as their own trades.
• Individual clearing member (ICM) – a member of the CCP who clears only their own trades.
• Non-clearing member (NCM) – an institution having no relationship with the CCP but which can trade through a GCM.

These relationships are illustrated in Figure 7.4.

Figure 7.4 Illustration of the relationship between CCPs and clearing members.

A GCM or ICM will typically be a large bank or dealer who has a large number of counterparties. An NCM is more obviously characterised by an end-user of OTC derivatives that may channel most or all of its trades through a single counterparty. By this counterparty being a GCM, the end-user can gain benefits from central clearing even though they are not a clearing member. Whilst these are the more obvious roles of members, they are not the only characterisations: for example, a GCM may in fact be another CCP and an NCM may be a smaller bank.

7.2.2 Variation Margin

Variation margin is a simple concept, which is an adjustment for the change in valuation of the relevant positions at periodic intervals of at least daily frequency. A CCP may also make intraday margin calls if large price movements ...