The "principal-to-principal" clearing model is the most popular clearing model when it comes to day-to-day practice of the CCPs and is distinguished from the second main type: the “agency” one.


The “principal-to-principal” model for clearing client transactions is buit on two separate legal relationships:


1) a principal-to-principal transaction between the clearing broker and the CCP, which is governed by the rules of the CCP (the CCP Transaction), and


2) a principal-to-principal transaction between the clearing broker and the client, which is governed by the terms of the client clearing agreement between the two (the Client Transaction).


In economic categories the terms of each CCP Transaction and the related Client Transaction are equivalent, save for the fact that the clearing broker takes the opposite position in the CCP Transaction to the position he has under the related Client Transaction.


Once both of those transactions have been entered into by the clearing broker, the Client Transaction is considered to be "cleared".


Principal-to-principal clearing model involves the transit risk for the client.


In Europe the principal-to-principal model is used for exchange-traded derivatives, which means that positions held by an intermediary on behalf of a client are held as principal (ESMA's Final Report Draft Regulatory and Implementing Technical Standards MiFID II/MiFIR of 28 September 2015 (ESMA/2015/1464), p. 354).




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