As we can see, the GCM and DCM have a direct relationship with
the clearing house. The DCM can only clear business of an affiliated
company who is a NCM of Eurex whereas the GCM can clear busi-
ness for any NCM.
Customers can have a relationship with the GCM, DCM, an affiliated
NCM of the DCM or any NCM of the exchange.
The Options Clearing Corporation (OCC)
Options Clearing Corporation is the largest clearing organisation in
the world for options and was the first clearing house to receive
an AAA rating from Standard & Poor’s Corporation. Operating under
the jurisdiction of the Securities and Exchange Commission (SEC)
and the CFTC, OCC clears US-listed options, futures and options on
futures on a number of underlying financial assets including stocks,
currencies, stock indexes and interest rate products. The OCC’s
Clearing Membership consists of approximately 130 of the largest
US broker/dealers, US futures commission merchants and non-US
securities firms representing both professional traders and public cus-
tomers. The American Stock Exchange, the Chicago Board Options
Exchange, the International Securities Exchange, the Pacific Exchange
and the Philadelphia Stock Exchange share equal ownership of OCC.
It has in recent years developed and introduced a completely new
clearing system called ENCORE.
The ENCORE has enabled real-time processing capabilities, increased
flexibility by accommodating growth in options volume and new prod-
ucts, and provided secure Internet access to OCC’s customers.
There are several key stages in the ‘clearing process’ much of which
is generic across clearing houses.
A key stage is when and how the counterparty relationship between
the two parties to the trade on the exchange converts to a relationship
between the clearing house and each of the trade participants. That
stage is often referred to as novation.
The process of creating the trade in the name of the clearing house
as counterparty to each member is called novation. In this process
the clearing house becomes buyer to every seller of each transaction
40 Clearing and settlement of derivatives
and seller to every buyer of each transaction. At this point, the clear-
ing member has no counterparty risk in the market for their trade
other than with the clearing house. All open positions are only held
with the clearing house and it becomes irrelevant which market
member the trader dealt with originally. Once this process is com-
pleted, the clearing house is in a position to effect settlement of the
two transactions (Figures 3.3 and 3.4).
Settlement takes place between the Members and the clearing
house, not with each other. Counterparty risk between the members
has been removed.
The settlement process on LCH.Clearnet is secured by the use of a
direct debit system, known as the Protected Payment System (PPS).
Protected Payments System
LCH.Clearnet Limited operates PPS for the transfer of funds to and
from Clearing members. A Clearing member is required to maintain a
PPS bank account(s) in London in Great Britain Pounds (GBP) and
for each currency in which it incurs settlements at one of the partici-
pating PPS banks. Different banks can be used for different curren-
cies. Clearing Members are also required to maintain a USD account
at one of the specified banks for PPS in the United States. Any bank
charges arising from the operation of a PPS account are for the
account of the Clearing member. A PPS mandate must be completed,
the original of which is held at the PPS bank and a copy lodged with
LCH.Clearnet Limited.
The role of the clearing house 41
Figure 3.3 Trade Relationship
Figure 3.4 Novation

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