Meaning
A financial institution that maintains a direct contractual relationship with a central counterparty to settle its own trades and often those of its clients. The direct clearing participant assumes full responsibility for meeting margin calls and contributing to the default fund of the clearing house.
Balance Sheet
Accessing the clearing house without an intermediary reduces the costs associated with brokerage fees and third party credit spreads. A firm must maintain high levels of liquid capital to satisfy the stringent membership criteria and the ongoing demands of the risk management department.
Operational Control
Managing the settlement process in house provides the participant with greater visibility into its collateral requirements and trading positions. Direct integration with the systems of the clearing house allows for faster reconciliation of trades and more efficient allocation of capital across different asset classes.
Client Service
Offering clearing services to indirect participants provides an additional revenue stream through transaction fees and financing activities. The direct clearing participant acts as a buffer between the central counterparty and smaller market players, managing the credit risk of its clients while guaranteeing their trades to the clearing house. This role requires the institution to perform deep due diligence on every client to prevent the accumulation of excessive risk within its own portfolio.
