# What Are the Key Differences in Counterparty Risk between Cleared and OTC Options? ▴ Question

**Published:** 2025-08-06
**Categories:** Question

---

![A polished, two-toned surface, representing a Principal's proprietary liquidity pool for digital asset derivatives, underlies a teal, domed intelligence layer. This visualizes RFQ protocol dynamism, enabling high-fidelity execution and price discovery for Bitcoin options and Ethereum futures](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-platform-intelligence-layer.jpg)

![A central blue sphere, representing a Liquidity Pool, balances on a white dome, the Prime RFQ. Perpendicular beige and teal arms, embodying RFQ protocols and Multi-Leg Spread strategies, extend to four peripheral blue elements](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-digital-asset-derivatives-rfq-protocol-execution-framework.jpg)

## Concept

The fundamental distinction in [counterparty risk](https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) between cleared and over-the-counter (OTC) options lies in the architecture of the legal relationship and the mechanism for guaranteeing performance. An OTC option is a private, [bilateral agreement](https://prime.greeks.live/area/bilateral-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). The two parties are directly exposed to each other for the life of the contract. This architecture creates a direct and often opaque line of credit between the participants.

The primary risk is intensely personal to the counterparty; its failure to perform its obligations, whether due to insolvency or operational failure, results in a direct loss. The customization of these contracts, while a key advantage for hedging specific exposures, simultaneously fragments liquidity and complicates risk valuation.

[Cleared options](https://prime.greeks.live/area/cleared-options/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), conversely, are intermediated by a [central counterparty clearing](https://prime.greeks.live/area/central-counterparty-clearing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) house (CCP). The CCP interposes itself between the buyer and seller of every transaction, becoming the buyer to every seller and the seller to every buyer. This structural innovation effectively neutralizes bilateral counterparty risk. The individual participant’s risk is no longer tied to the solvency of the original trading partner but is instead collectivized and transferred to the CCP.

The [CCP](https://prime.greeks.live/area/ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), in turn, mitigates this aggregated risk through a multi-layered defense system, including stringent membership requirements, the mandatory posting of initial and variation margin, and a [default fund](https://prime.greeks.live/area/default-fund/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) collectively financed by its members. This system transforms a web of bilateral exposures into a hub-and-spoke model where the CCP acts as the load-bearing pillar, designed to withstand the failure of one or more of its members and preserve the integrity of the broader market.

> The core operational difference is the shift from a direct, bilateral risk relationship in OTC options to a centralized, mutually guaranteed system in cleared options, fundamentally altering the nature and management of default risk.

![A centralized platform visualizes dynamic RFQ protocols and aggregated inquiry for institutional digital asset derivatives. The sharp, rotating elements represent multi-leg spread execution and high-fidelity execution within market microstructure, optimizing price discovery and capital efficiency for block trade settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-for-high-fidelity-execution-1.jpg)

## How Does Central Clearing Alter Risk Exposure?

[Central clearing](https://prime.greeks.live/area/central-clearing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) fundamentally re-engineers the flow of risk. In an OTC arrangement, a default is a singular event between two parties, and the resulting losses are borne entirely by the non-defaulting party. The process of recovery can be lengthy, litigious, and uncertain, governed by the terms of the bilateral [ISDA Master Agreement](https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) and the complexities of bankruptcy law. The lack of price transparency in many OTC markets can make it difficult to even value the defaulted contract accurately, further complicating the recovery process. 

In a cleared environment, the default of a clearing member triggers a pre-defined and orderly resolution process managed by the CCP. The CCP’s first line of defense is the defaulting member’s own margin deposits. If these are insufficient, the CCP will draw on its own capital and then the collective default fund.

This mutualization of risk means that the failure of one participant is absorbed by the system as a whole, preventing a cascade of failures that could otherwise destabilize the market. The standardization of cleared option contracts further aids in this process, as it allows the CCP to quickly and accurately value the defaulted portfolio and hedge or auction it off to other members.

![Sleek, off-white cylindrical module with a dark blue recessed oval interface. This represents a Principal's Prime RFQ gateway for institutional digital asset derivatives, facilitating private quotation protocol for block trade execution, ensuring high-fidelity price discovery and capital efficiency through low-latency liquidity aggregation](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-portal-optimal-institutional-digital-asset-execution.jpg)

![The image presents a stylized central processing hub with radiating multi-colored panels and blades. This visual metaphor signifies a sophisticated RFQ protocol engine, orchestrating price discovery across diverse liquidity pools](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-and-liquidity-aggregation-hub.jpg)

## Strategy

The strategic decision to use cleared versus [OTC options](https://prime.greeks.live/area/otc-options/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) is a trade-off between customization and counterparty [risk mitigation](https://prime.greeks.live/area/risk-mitigation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). An institution’s choice reflects its specific hedging needs, risk tolerance, and operational capabilities. A corporate treasurer seeking to hedge a unique, long-dated foreign exchange exposure might find that only a customized OTC option can provide the necessary precision.

In this case, the strategy is to accept the bilateral counterparty risk in exchange for a perfect hedge. The risk is managed through careful counterparty selection, the negotiation of collateral agreements, and the ongoing monitoring of the counterparty’s creditworthiness.

Conversely, a hedge fund employing a high-volume, standardized options strategy would likely favor the cleared market. The fund’s strategy depends on liquidity, speed of execution, and the minimization of operational friction. The credit risk of its numerous counterparties is a significant concern, and the centralized clearing model provides an efficient solution.

By trading cleared options, the fund outsources the management of counterparty risk to the CCP, allowing it to focus on its trading strategy. The [margin requirements](https://prime.greeks.live/area/margin-requirements/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) of the CCP are a known cost of doing business, accepted in exchange for the near-elimination of bilateral default risk.

![A central mechanism of an Institutional Grade Crypto Derivatives OS with dynamically rotating arms. These translucent blue panels symbolize High-Fidelity Execution via an RFQ Protocol, facilitating Price Discovery and Liquidity Aggregation for Digital Asset Derivatives within complex Market Microstructure](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-rfq-engine-for-digital-asset-derivatives-best-execution.jpg)

## Framework for Assessing Counterparty Risk

A robust framework for assessing counterparty risk in both cleared and [OTC markets](https://prime.greeks.live/area/otc-markets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) involves several key components. For OTC transactions, the framework must include:

- **Credit Analysis** A thorough due diligence process to assess the financial health and creditworthiness of potential counterparties. This includes an analysis of financial statements, credit ratings, and market-based indicators of credit risk.

- **[Collateral Management](https://prime.greeks.live/area/collateral-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite)** The negotiation of bilateral collateral agreements, specifying the types of eligible collateral, valuation methodologies, and the frequency of [margin calls](https://prime.greeks.live/area/margin-calls/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite). Effective collateral management is a critical tool for mitigating OTC counterparty risk. 

- **Exposure Monitoring** The continuous monitoring of counterparty exposure, taking into account the current market value of all outstanding contracts and potential future exposure. This requires sophisticated [risk management](https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) systems capable of calculating metrics such as Potential Future Exposure (PFE).

For cleared transactions, the risk assessment framework shifts its focus from individual counterparties to the CCP itself:

- **CCP Due Diligence** An evaluation of the CCP’s risk management practices, including its margin methodology, [default waterfall](https://prime.greeks.live/area/default-waterfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite), and the adequacy of its default fund.

- **Liquidity Risk Management** An assessment of the liquidity of the cleared products and the potential for margin calls to create liquidity strains on the firm’s resources.

- **[Systemic Risk](https://prime.greeks.live/area/systemic-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) Awareness** An understanding of the systemic risks inherent in the central clearing model, including the potential for a CCP failure, however remote, and its potential impact on the market.

> Strategic risk management shifts from counterparty-specific analysis in OTC markets to a systemic and operational focus on the clearinghouse in the cleared environment.

![Central axis, transparent geometric planes, coiled core. Visualizes institutional RFQ protocol for digital asset derivatives, enabling high-fidelity execution of multi-leg options spreads and price discovery](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-2.jpg)

## Comparing Risk Mitigation Mechanisms

The following table compares the primary risk mitigation mechanisms in cleared and OTC option markets:

| Risk Mitigation Mechanism | Cleared Options | OTC Options |
| --- | --- | --- |
| Counterparty Guarantee | Provided by the Central Counterparty (CCP) | Relies on the creditworthiness of the bilateral counterparty |
| Margin Requirements | Standardized and mandatory initial and variation margin, set by the CCP | Customized and bilaterally negotiated; may not always be required |
| Default Management | Orderly, pre-defined process managed by the CCP, including a default fund | Governed by bilateral legal agreements (e.g. ISDA Master Agreement) and bankruptcy proceedings |
| Transparency | High degree of price and volume transparency | Low transparency, as trades are privately negotiated |

![A sleek, futuristic institutional-grade instrument, representing high-fidelity execution of digital asset derivatives. Its sharp point signifies price discovery via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/precision-rfq-execution-engine-for-institutional-digital-asset-derivatives.jpg)

![A futuristic system component with a split design and intricate central element, embodying advanced RFQ protocols. This visualizes high-fidelity execution, precise price discovery, and granular market microstructure control for institutional digital asset derivatives, optimizing liquidity provision and minimizing slippage](https://options.greeks.live/wp-content/uploads/2025/07/advanced-rfq-protocols-for-digital-asset-derivatives-price-discovery.jpg)

## Execution

From an execution perspective, the differences between cleared and OTC options are profound, impacting everything from trade negotiation to post-trade processing. The execution of an OTC option is a manual, high-touch process. It begins with the negotiation of the contract terms, a bespoke process that can involve multiple phone calls and emails between the two parties.

Once the terms are agreed upon, a confirmation is drafted and signed, and the trade is booked into the firms’ respective internal systems. The ongoing management of the trade, including any required collateral posting and the eventual settlement, is also a bilateral process, managed directly between the two counterparties.

The execution of a cleared option is a more streamlined and automated process. Trades are typically executed on an electronic trading platform, with the CCP’s clearing service integrated into the trade lifecycle. The standardization of the contracts allows for anonymous, order-book-based trading, although block trading protocols are also available for larger orders. Once a trade is executed, it is automatically submitted for clearing, and the CCP becomes the counterparty.

All subsequent post-trade events, such as margin calls and settlement, are managed through the CCP’s systems, providing a single point of contact for all participants. This high degree of automation reduces operational risk and increases efficiency.

![A polished, dark teal institutional-grade mechanism reveals an internal beige interface, precisely deploying a metallic, arrow-etched component. This signifies high-fidelity execution within an RFQ protocol, enabling atomic settlement and optimized price discovery for institutional digital asset derivatives and multi-leg spreads, ensuring minimal slippage and robust capital efficiency](https://options.greeks.live/wp-content/uploads/2025/08/quantitative-finance-driven-rfq-workflow-for-best-execution-in-digital-assets.jpg)

## What Is the Operational Impact of Margin and Collateral?

The operational management of margin and collateral is a critical function in both cleared and OTC markets, but the processes and complexities differ significantly. In the OTC space, collateral management is a highly fragmented and customized process. Each bilateral relationship is governed by its own Credit Support Annex (CSA), which specifies the terms of the collateral agreement.

This requires firms to manage multiple, disparate workflows, and to have the systems and expertise to value a wide range of collateral types. The process of making and receiving margin calls, resolving disputes, and managing the custody of collateral is a significant operational undertaking.

In the cleared world, the CCP centralizes and standardizes the collateral management process. All [clearing members](https://prime.greeks.live/area/clearing-members/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite) are subject to the same set of rules and procedures, and the CCP’s systems automate the calculation and collection of margin payments. While this simplifies the operational workflow, it also introduces its own set of challenges.

The CCP’s margin models can be complex, and firms must have the ability to anticipate and meet potentially large margin calls, particularly during periods of high market volatility. This requires robust liquidity management and forecasting capabilities.

> The operational burden of counterparty risk management is shifted from bespoke bilateral negotiations in OTC markets to standardized, systemic processes in the cleared environment.

![An intricate, transparent digital asset derivatives engine visualizes market microstructure and liquidity pool dynamics. Its precise components signify high-fidelity execution via FIX Protocol, facilitating RFQ protocols for block trade and multi-leg spread strategies within an institutional-grade Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-derivatives-rfq-liquidity-ecosystem.jpg)

## Default Waterfall and Loss Mutualization

The concept of a default waterfall is central to the risk management framework of a CCP and represents a key difference from the bilateral nature of OTC risk. A default waterfall is a sequential process for allocating losses in the event that a clearing member defaults and its margin deposits are insufficient to cover its obligations. A typical default waterfall is structured as follows:

- **Defaulting Member’s Margin** The first layer of protection is the initial and variation margin posted by the defaulting member.

- **CCP’s Contribution** The CCP will then contribute a portion of its own capital to cover any remaining losses.

- **Default Fund** The CCP will then draw upon the default fund, which is a pool of capital contributed by all clearing members.

- **Further Assessments** If the default fund is exhausted, the CCP may have the right to levy additional assessments on its surviving clearing members.

This process of loss mutualization is a defining feature of central clearing. It ensures that the failure of a single participant does not lead to a systemic crisis. The following table provides a simplified illustration of a CCP’s default waterfall:

| Layer | Description | Typical Size |
| --- | --- | --- |
| 1 | Defaulting Member’s Initial Margin | Varies by member’s risk profile |
| 2 | CCP’s “Skin-in-the-Game” | A pre-defined portion of CCP’s capital |
| 3 | Default Fund Contributions | Pooled contributions from all clearing members |
| 4 | Assessments on Clearing Members | Additional calls on clearing members’ capital |

![Abstract geometric planes in teal, navy, and grey intersect. A central beige object, symbolizing a precise RFQ inquiry, passes through a teal anchor, representing High-Fidelity Execution within Institutional Digital Asset Derivatives](https://options.greeks.live/wp-content/uploads/2025/07/rfq-protocols-for-digital-asset-derivatives-high-fidelity-execution-liquidity-aggregation-price-discovery-market-microstructure.jpg)

## References

- Gregory, Jon. “The World’s Top Authority explains Derivatives and Counterparty Risk.” _Capital Market Insights_, 2022.

- Acharya, Viral V. and Alberto Bisin. “From over-the-counter to centralized clearing ▴ The case of credit derivatives.” _NYU Stern School of Business_, 2010.

- PwC. “1.3 Derivative categories.” _PwC Viewpoint_, 2024.

- “Cleared Derivatives – A comprehensive guide.” _Clearit_, 2024.

- “OTC Derivatives and Counterparty Risk.” _Capital Market Insights_, 2022.

![Abstract geometric forms, including overlapping planes and central spherical nodes, visually represent a sophisticated institutional digital asset derivatives trading ecosystem. It depicts complex multi-leg spread execution, dynamic RFQ protocol liquidity aggregation, and high-fidelity algorithmic trading within a Prime RFQ framework, ensuring optimal price discovery and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-liquidity-aggregation-market-microstructure-high-fidelity-execution-alpha-generation-prime-os-capital-efficiency.jpg)

## Reflection

![The abstract metallic sculpture represents an advanced RFQ protocol for institutional digital asset derivatives. Its intersecting planes symbolize high-fidelity execution and price discovery across complex multi-leg spread strategies](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-rfq-execution-microstructure-optimization.jpg)

## Optimizing Your Risk Architecture

The choice between cleared and OTC options is not merely a tactical decision but a reflection of an institution’s underlying risk philosophy. Understanding the architectural differences in how these two market structures handle counterparty risk is the first step. The next is to look inward at your own operational framework. Does your current system for managing bilateral exposures provide you with the requisite level of control and transparency?

Are your liquidity management protocols robust enough to handle the demands of central clearing? The knowledge of these systems is a component of a larger intelligence apparatus. A superior operational framework is the foundation of a durable strategic edge.

![A complex, multi-layered electronic component with a central connector and fine metallic probes. This represents a critical Prime RFQ module for institutional digital asset derivatives trading, enabling high-fidelity execution of RFQ protocols, price discovery, and atomic settlement for multi-leg spreads with minimal latency](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-rfq-engine-driving-best-execution-and-liquidity.jpg)

## Glossary

<a href="https://prime.greeks.live/area/bilateral-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![The image features layered structural elements, representing diverse liquidity pools and market segments within a Principal's operational framework. A sharp, reflective plane intersects, symbolizing high-fidelity execution and price discovery via private quotation protocols for institutional digital asset derivatives, emphasizing atomic settlement nodes](https://options.greeks.live/wp-content/uploads/2025/07/systemic-interplay-for-institutional-digital-asset-derivatives-execution-via-advanced-rfq-protocols.jpg)

## Bilateral Agreement

Meaning ▴ A bilateral agreement defines a direct contractual arrangement between two entities, formalizing terms and operational parameters for specific transactions. </a><a href="https://prime.greeks.live/area/counterparty-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Metallic hub with radiating arms divides distinct quadrants. This abstractly depicts a Principal's operational framework for high-fidelity execution of institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-execution-prime-os-market-microstructure.jpg)

## Counterparty Risk

Meaning ▴ Counterparty risk denotes the potential for financial loss stemming from a counterparty's failure to fulfill its contractual obligations in a transaction. </a><a href="https://prime.greeks.live/area/central-counterparty-clearing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central, metallic hub anchors four symmetrical radiating arms, two with vibrant, textured teal illumination. This depicts a Principal's high-fidelity execution engine, facilitating private quotation and aggregated inquiry for institutional digital asset derivatives via RFQ protocols, optimizing market microstructure and deep liquidity pools](https://options.greeks.live/wp-content/uploads/2025/07/prime-brokerage-digital-asset-rfq-execution-engine-microstructure.jpg)

## Central Counterparty Clearing

Meaning ▴ Central Counterparty Clearing, or CCP Clearing, denotes a financial market infrastructure that interposes itself between two counterparties to a transaction, becoming the buyer to every seller and the seller to every buyer. </a><a href="https://prime.greeks.live/area/cleared-options/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Prime RFQ visualizes institutional digital asset derivatives RFQ protocol and high-fidelity execution. Glowing liquidity streams converge at intelligent routing nodes, aggregating market microstructure for atomic settlement, mitigating counterparty risk within dark liquidity](https://options.greeks.live/wp-content/uploads/2025/08/prime-os-high-fidelity-digital-asset-derivatives-rfq-protocol.jpg)

## Cleared Options

Meaning ▴ Cleared options are standardized derivative contracts where a central clearing counterparty (CCP) novates and manages counterparty risk post-execution. </a><a href="https://prime.greeks.live/area/default-fund/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometric forms in dark blue, beige, and teal converge around a metallic gear, symbolizing a Prime RFQ for institutional digital asset derivatives. A sleek bar extends, representing high-fidelity execution and precise delta hedging within a multi-leg spread framework, optimizing capital efficiency via RFQ protocols](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-derivatives-rfq-execution-engine-architecture.jpg)

## Default Fund

Meaning ▴ The Default Fund represents a pre-funded pool of capital contributed by clearing members of a Central Counterparty (CCP) or exchange, specifically designed to absorb financial losses incurred from a defaulting participant that exceed their posted collateral and the CCP's own capital contributions. </a><a href="https://prime.greeks.live/area/ccp/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Intersecting teal and dark blue planes, with reflective metallic lines, depict structured pathways for institutional digital asset derivatives trading. This symbolizes high-fidelity execution, RFQ protocol orchestration, and multi-venue liquidity aggregation within a Prime RFQ, reflecting precise market microstructure and optimal price discovery](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-digital-asset-rfq-execution-liquidity-microstructure.jpg)

## Ccp

Meaning ▴ A Central Counterparty, or CCP, operates as a clearing house entity positioned between two counterparties to a transaction, assuming the credit risk of both. </a><a href="https://prime.greeks.live/area/isda-master-agreement/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated, symmetrical apparatus depicts an institutional-grade RFQ protocol hub for digital asset derivatives, where radiating panels symbolize liquidity aggregation across diverse market makers. Central beams illustrate real-time price discovery and high-fidelity execution of complex multi-leg spreads, ensuring atomic settlement within a Prime RFQ](https://options.greeks.live/wp-content/uploads/2025/07/institutional-grade-rfq-protocol-facilitating-atomic-settlement-and-high-fidelity-execution-of-multi-leg-spreads.jpg)

## Isda Master Agreement

Meaning ▴ The ISDA Master Agreement is a standardized contractual framework for privately negotiated over-the-counter (OTC) derivatives transactions, establishing common terms for a wide array of financial instruments. </a><a href="https://prime.greeks.live/area/central-clearing/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Illuminated conduits passing through a central, teal-hued processing unit abstractly depict an Institutional-Grade RFQ Protocol. This signifies High-Fidelity Execution of Digital Asset Derivatives, enabling Optimal Price Discovery and Aggregated Liquidity for Multi-Leg Spreads](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-high-fidelity-best-execution.jpg)

## Central Clearing

Meaning ▴ Central Clearing designates the operational framework where a Central Counterparty (CCP) interposes itself between the original buyer and seller of a financial instrument, becoming the legal counterparty to both. </a><a href="https://prime.greeks.live/area/risk-mitigation/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central teal and dark blue conduit intersects dynamic, speckled gray surfaces. This embodies institutional RFQ protocols for digital asset derivatives, ensuring high-fidelity execution across fragmented liquidity pools](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-3.jpg)

## Risk Mitigation

Meaning ▴ Risk Mitigation involves the systematic application of controls and strategies designed to reduce the probability or impact of adverse events on a system's operational integrity or financial performance. </a><a href="https://prime.greeks.live/area/otc-options/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A translucent institutional-grade platform reveals its RFQ execution engine with radiating intelligence layer pathways. Central price discovery mechanisms and liquidity pool access points are flanked by pre-trade analytics modules for digital asset derivatives and multi-leg spreads, ensuring high-fidelity execution](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-execution-core-platform.jpg)

## Otc Options

Meaning ▴ OTC Options are privately negotiated derivative contracts, customized between two parties, providing the holder the right, but not the obligation, to buy or sell an underlying digital asset at a specified strike price by a predetermined expiration date. </a><a href="https://prime.greeks.live/area/margin-requirements/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central translucent disk, representing a Liquidity Pool or RFQ Hub, is intersected by a precision Execution Engine bar. Its core, an Intelligence Layer, signifies dynamic Price Discovery and Algorithmic Trading logic for Digital Asset Derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-visualizing-microstructure.jpg)

## Margin Requirements

Meaning ▴ Margin requirements specify the minimum collateral an entity must deposit with a broker or clearing house to cover potential losses on open leveraged positions. </a><a href="https://prime.greeks.live/area/otc-markets/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sleek, cream-colored, dome-shaped object with a dark, central, blue-illuminated aperture, resting on a reflective surface against a black background. This represents a cutting-edge Crypto Derivatives OS, facilitating high-fidelity execution for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/08/institutional-digital-asset-derivatives-prime-os-high-fidelity-rfq-execution-engine-intelligence-layer.jpg)

## Otc Markets

Meaning ▴ OTC Markets denote a decentralized financial environment where participants trade directly with one another, rather than through a centralized exchange or regulated order book. </a><a href="https://prime.greeks.live/area/collateral-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A sophisticated, illuminated device representing an Institutional Grade Prime RFQ for Digital Asset Derivatives. Its glowing interface indicates active RFQ protocol execution, displaying high-fidelity execution status and price discovery for block trades](https://options.greeks.live/wp-content/uploads/2025/07/principal-rfq-engine-for-digital-asset-derivatives-best-execution-1.jpg)

## Collateral Management

Meaning ▴ Collateral Management is the systematic process of monitoring, valuing, and exchanging assets to secure financial obligations, primarily within derivatives, repurchase agreements, and securities lending transactions. </a><a href="https://prime.greeks.live/area/margin-calls/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A central glowing core within metallic structures symbolizes an Institutional Grade RFQ engine. This Intelligence Layer enables optimal Price Discovery and High-Fidelity Execution for Digital Asset Derivatives, streamlining Block Trade and Multi-Leg Spread Atomic Settlement](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-engine-microstructure-core.jpg)

## Margin Calls

Meaning ▴ A margin call is a demand for additional collateral from a counterparty whose leveraged positions have experienced adverse price movements, causing their account equity to fall below the required maintenance margin level. </a><a href="https://prime.greeks.live/area/risk-management/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A complex, reflective apparatus with concentric rings and metallic arms supporting two distinct spheres. This embodies RFQ protocols, market microstructure, and high-fidelity execution for institutional digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-3.jpg)

## Risk Management

Meaning ▴ Risk Management is the systematic process of identifying, assessing, and mitigating potential financial exposures and operational vulnerabilities within an institutional trading framework. </a><a href="https://prime.greeks.live/area/default-waterfall/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Sharp, intersecting elements, two light, two teal, on a reflective disc, centered by a precise mechanism. This visualizes institutional liquidity convergence for multi-leg options strategies in digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-block-trade-execution.jpg)

## Default Waterfall

Meaning ▴ In institutional finance, particularly within clearing houses or centralized counterparties (CCPs) for derivatives, a Default Waterfall defines the pre-determined sequence of financial resources that will be utilized to absorb losses incurred by a defaulting participant. </a><a href="https://prime.greeks.live/area/systemic-risk/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![Abstract geometry illustrates interconnected institutional trading pathways. Intersecting metallic elements converge at a central hub, symbolizing a liquidity pool or RFQ aggregation point for high-fidelity execution of digital asset derivatives](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-cross-market-microstructure-for-digital-asset-derivatives.jpg)

## Systemic Risk

Meaning ▴ Systemic risk denotes the potential for a localized failure within a financial system to propagate and trigger a cascade of subsequent failures across interconnected entities, leading to the collapse of the entire system. </a><a href="https://prime.greeks.live/area/clearing-members/?utm_source=options.greeks.live&utm_medium=referral&utm_campaign=satellite" class="glossary-item-box">
![A gleaming, translucent sphere with intricate internal mechanisms, flanked by precision metallic probes, symbolizes a sophisticated Principal's RFQ engine. This represents the atomic settlement of multi-leg spread strategies, enabling high-fidelity execution and robust price discovery within institutional digital asset derivatives markets, minimizing latency and slippage for optimal alpha generation and capital efficiency](https://options.greeks.live/wp-content/uploads/2025/07/inst-digital-asset-deriv-rfq-os-for-optimal-high-fidelity-trade-exec.jpg)

## Clearing Members

Meaning ▴ Clearing Members are financial institutions granted direct access to a central clearing counterparty (CCP), assuming the critical responsibility for the settlement, risk management, and guarantee of all trades executed by themselves and their clients. </a>

**Tags:** [Systemic Risk](https://options.greeks.live/area/systemic-risk/), [Central Clearing](https://options.greeks.live/area/central-clearing/), [Default Fund](https://options.greeks.live/area/default-fund/), [CCP](https://options.greeks.live/area/ccp/), [Master Agreement](https://options.greeks.live/area/master-agreement/), [OTC Markets](https://options.greeks.live/area/otc-markets/)	

## Discover More

- 
### [What Are the Key Differences between Managing Risk for Listed versus OTC Derivatives?](https://options.greeks.live/question/what-are-the-key-differences-between-managing-risk-for-listed-versus-otc-derivatives/)
![Sleek, metallic, modular hardware with visible circuit elements, symbolizing the market microstructure for institutional digital asset derivatives. This low-latency infrastructure supports RFQ protocols, enabling high-fidelity execution for private quotation and block trade settlement, ensuring capital efficiency within a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/08/market-microstructure-engine-for-crypto-derivatives-rfq-protocol.jpg)

Derivatives risk management is either a centralized, automated function of market infrastructure or a decentralized, bespoke counterparty obligation.

- 
### [What Are the Primary Counterparty Risks Associated with a Bilateral RFQ and How Are They Systemically Managed?](https://options.greeks.live/question/what-are-the-primary-counterparty-risks-associated-with-a-bilateral-rfq-and-how-are-they-systemically-managed/)
![A modular institutional trading interface displays a precision trackball and granular controls on a teal execution module. Parallel surfaces symbolize layered market microstructure within a Principal's operational framework, enabling high-fidelity execution for digital asset derivatives via RFQ protocols.](https://options.greeks.live/wp-content/uploads/2025/07/high-fidelity-institutional-digital-asset-derivatives-rfq-protocol-controls.jpg)

Bilateral RFQ counterparty risk is managed by systemically securing credit exposure through legal agreements, collateral, and controls.

- 
### [How Does the Basel III Framework Specifically Address Counterparty Risk in Derivatives Trading?](https://options.greeks.live/question/how-does-the-basel-iii-framework-specifically-address-counterparty-risk-in-derivatives-trading/)
![A central core, symbolizing a Crypto Derivatives OS and Liquidity Pool, is intersected by two abstract elements. These represent Multi-Leg Spread and Cross-Asset Derivatives executed via RFQ Protocol. This visual embodies High-Fidelity Execution within an Institutional Trading framework, emphasizing Market Microstructure and Capital Efficiency.](https://options.greeks.live/wp-content/uploads/2025/07/digital-asset-derivatives-rfq-protocol-multi-leg-spread-execution.jpg)

Basel III addresses counterparty risk by systematizing its measurement and mandating capital against both default and credit value fluctuations.

- 
### [How Do Central Clearinghouses Mitigate Counterparty Risk in Derivatives?](https://options.greeks.live/question/how-do-central-clearinghouses-mitigate-counterparty-risk-in-derivatives/)
![A layered, cream and dark blue structure with a transparent angular screen. This abstract visual embodies an institutional-grade Prime RFQ for high-fidelity RFQ execution, enabling deep liquidity aggregation and real-time risk management for digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/prime-os-layered-structure-for-institutional-digital-asset-rfq-execution.jpg)

A central clearinghouse mitigates risk by becoming the counterparty to all trades and enforcing a rigid, multi-layered loss absorption structure.

- 
### [How Does the Basel III CVA Capital Charge Incentivize Central Clearing for OTC Derivatives?](https://options.greeks.live/question/how-does-the-basel-iii-cva-capital-charge-incentivize-central-clearing-for-otc-derivatives/)
![A marbled sphere symbolizes a complex institutional block trade, resting on segmented platforms representing diverse liquidity pools and execution venues. This visualizes sophisticated RFQ protocols, ensuring high-fidelity execution and optimal price discovery within dynamic market microstructure for digital asset derivatives. It reflects capital efficiency and intelligent smart order routing.](https://options.greeks.live/wp-content/uploads/2025/07/principal-rfq-aggregation-digital-asset-derivative-execution-optimization.jpg)

The Basel III CVA capital charge incentivizes central clearing by imposing a significant capital cost on bilateral trades that is eliminated for centrally cleared transactions.

- 
### [What Are the Key Differences in Counterparty Risk between RFQ and Open Order Book Systems?](https://options.greeks.live/question/what-are-the-key-differences-in-counterparty-risk-between-rfq-and-open-order-book-systems/)
![Abstract depiction of an advanced institutional trading system, featuring a prominent sensor for real-time price discovery and an intelligence layer. Visible circuitry signifies algorithmic trading capabilities, low-latency execution, and robust FIX protocol integration for digital asset derivatives. This represents a principal's operational framework for optimized RFQ protocols and atomic settlement.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-prime-os-high-fidelity-rfq-protocols.jpg)

RFQ systems create direct, bilateral counterparty risk managed by legal agreements; order books mutualize it via a central clearinghouse.

- 
### [How Does Central Clearing Impact Counterparty Risk in Derivatives Trading?](https://options.greeks.live/question/how-does-central-clearing-impact-counterparty-risk-in-derivatives-trading/)
![A central illuminated hub with four light beams forming an 'X' against dark geometric planes. This embodies a Prime RFQ orchestrating multi-leg spread execution, aggregating RFQ liquidity across diverse venues for optimal price discovery and high-fidelity execution of institutional digital asset derivatives.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-engine-orchestrating-high-fidelity-execution-and-optimal-price-discovery.jpg)

Central clearing transforms counterparty risk by novating bilateral trades, replacing individual exposures with a single, collateralized obligation to a regulated CCP.

- 
### [How Does Central Counterparty Clearing Mitigate Risk in RFQ Trades?](https://options.greeks.live/question/how-does-central-counterparty-clearing-mitigate-risk-in-rfq-trades/)
![A central concentric ring structure, representing a Prime RFQ hub, processes RFQ protocols. Radiating translucent geometric shapes, symbolizing block trades and multi-leg spreads, illustrate liquidity aggregation for digital asset derivatives. Sharp angular elements highlight high-fidelity execution and price discovery in market microstructure.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-protocol-execution-engine-4.jpg)

A CCP mitigates RFQ risk by novating the trade, becoming the sole counterparty and applying a systemic, multi-layered risk waterfall.

- 
### [A Trader’s Guide to Central Clearing Vs Bilateral Risk](https://options.greeks.live/guide/a-traders-guide-to-central-clearing-vs-bilateral-risk/)
![A stylized depiction of institutional-grade digital asset derivatives RFQ execution. A central glowing liquidity pool for price discovery is precisely pierced by an algorithmic trading path, symbolizing high-fidelity execution and slippage minimization within market microstructure via a Prime RFQ.](https://options.greeks.live/wp-content/uploads/2025/07/institutional-digital-asset-derivatives-rfq-high-fidelity-execution-1.jpg)

Master the market's two risk systems; transform your understanding of counterparty exposure into a direct line to capital efficiency.

---

## Raw Schema Data

```json
{
    "@context": "https://schema.org",
    "@type": "BreadcrumbList",
    "itemListElement": [
        {
            "@type": "ListItem",
            "position": 1,
            "name": "Home",
            "item": "https://options.greeks.live"
        },
        {
            "@type": "ListItem",
            "position": 2,
            "name": "Question",
            "item": "https://options.greeks.live/question/"
        },
        {
            "@type": "ListItem",
            "position": 3,
            "name": "What Are the Key Differences in Counterparty Risk between Cleared and OTC Options?",
            "item": "https://options.greeks.live/question/what-are-the-key-differences-in-counterparty-risk-between-cleared-and-otc-options/"
        }
    ]
}
```

```json
{
    "@context": "https://schema.org",
    "@type": "Organization",
    "@id": "https://greeks.live/#organization",
    "name": "Greeks.Live",
    "url": "https://greeks.live/",
    "description": "Greeks.live is the definitive toolkit for the professional options trader, dedicated to empowering our users with institutional-grade data, advanced analytics, and a comprehensive suite of trading tools designed to provide a decisive edge in the market. Every article and guide published under the Greeks.live name is a product of our deep commitment to data-driven analysis and our mission to support the global trading community.",
    "email": "support@greeks.live",
    "logo": {
        "@type": "ImageObject",
        "url": "https://options.greeks.live/wp-content/uploads/2025/07/Greeks.Live-Logo-Icon.svg"
    },
    "hasPart": [
        {
            "@type": "WebSite",
            "name": "About Us",
            "url": "https://about.greeks.live"
        },
        {
            "@type": "WebSite",
            "name": "App Download Page",
            "url": "https://about.greeks.live/#/download/basic_trade"
        },
        {
            "@type": "WebSite",
            "name": "Newcomers' Guide",
            "url": "https://twisty-sign-c8b.notion.site/Guide-for-Greeks-live-X-Deribit-Newbies-5a08a3052822427d800af6eaf3704c8d"
        },
        {
            "@type": "WebSite",
            "name": "Knowledge Base",
            "url": "https://linktr.ee/greeks.live"
        },
        {
            "@type": "WebSite",
            "name": "Option Terminology",
            "url": "https://greekslive.notion.site/88dfc00e7c584d4d8969b6302a79a12f?pvs=4"
        },
        {
            "@type": "WebSite",
            "name": "Terms of Service",
            "url": "https://greeks.live/#/tos"
        },
        {
            "@type": "WebSite",
            "name": "Disclaimer",
            "url": "https://greeks.live/#/disclaimer"
        }
    ],
    "sameAs": [
        "https://x.com/greekslive",
        "https://youtube.com/@greeks_live?si=-KjT0Lkw4WUCI0tD",
        "https://t.me/greekslive_notifications",
        "https://t.me/greekslive",
        "https://pinterest.com/greekslive/"
    ],
    "makesOffer": [
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "RFQ Platform",
                "url": "https://rfq.greeks.live",
                "description": "Execute institutional-grade block trades for crypto options and futures. This platform provides deep, over-the-counter (OTC) liquidity via a professional Request for Quote system.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Lending Tools",
                "url": "https://lend.greeks.live",
                "description": "Manage crypto lending and borrowing activities to earn yield or secure loans. This suite of tools helps users analyze interest rates and manage collateralized debt positions.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Data Lab",
                "url": "https://greeks.live/#/deribit/tools/datalab/BTC",
                "description": "Analyze historical and real-time options data with advanced metrics. This tool is designed for backtesting strategies and identifying market trends through comprehensive data visualization.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Profit & Loss Analysis (PnL)",
                "url": "https://greeks.live/#/deribit/tools/pnl_analysis",
                "description": "Track and analyze the Profit and Loss (PnL) of your options portfolio. This tool provides detailed performance metrics to help traders evaluate and refine their strategies.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Position Visualization",
                "url": "https://greeks.live/#/deribit/tools/pv/BTC",
                "description": "Visualize complex options positions and their corresponding risk profiles. This tool generates payoff diagrams to help traders intuitively understand potential profit, loss, and exposure.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Options Calculator",
                "url": "https://greeks.live/#/deribit/tools/calculator",
                "description": "Calculate the theoretical price and risk parameters ('the Greeks') of crypto options. An essential tool for pricing new trades and analyzing the sensitivity of existing positions.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Greeks.live Main Platform",
                "url": "https://greeks.live/",
                "description": "The central hub for the Greeks.live suite of professional cryptocurrency options and derivatives trading tools. Access analytics, manage positions, and explore the ecosystem.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Community Forum",
                "url": "https://t.greeks.live",
                "description": "Join the official Greeks.live community. Connect with other traders, share insights, and receive the latest updates directly from the team.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Greeks.live for Deribit",
                "url": "http://deribit.greeks.live",
                "description": "A dedicated interface for trading on the Deribit exchange. This platform leverages Greeks.live's advanced analytics and tools specifically for users of Deribit's options and futures markets.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "Greeks.live for OKX",
                "url": "http://okx.greeks.live",
                "description": "A dedicated interface for trading on the OKX exchange. This platform integrates Greeks.live's powerful analytics with the OKX marketplace, focusing on its options and derivatives products.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "GLVS.AI Trading Platform",
                "url": "https://www.glvs.ai/",
                "description": "An AI-powered platform for automated crypto options trading. Leverage advanced algorithms and data-driven signals to develop and deploy sophisticated, hands-free trading strategies.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        },
        {
            "@type": "Offer",
            "itemOffered": {
                "@type": "Service",
                "name": "API Testnet & Sandbox",
                "url": "https://test.greeks.live",
                "description": "A dedicated testnet environment for developers to test their API integrations and automated trading strategies. This sandbox allows for full functionality testing without risking real funds.",
                "provider": {
                    "@id": "https://greeks.live/#organization"
                }
            }
        }
    ],
    "subOrganization": [
        {
            "@type": "Organization",
            "name": "GreeksLive HK Co., Limited",
            "email": "support@greeks.live",
            "telephone": "+852-56418949",
            "address": {
                "@type": "PostalAddress",
                "streetAddress": "Unit 11, 27/F, K. Wah Centre, 191 Java Road",
                "addressLocality": "Hong Kong",
                "addressRegion": "North Point",
                "addressCountry": "CN",
                "postalCode": "0000"
            },
            "geo": {
                "@type": "GeoCoordinates",
                "latitude": "22.2932357",
                "longitude": "114.2022026"
            },
            "image": "https://options.greeks.live/wp-content/uploads/2025/08/Wah-Centre-Hong-Kong.jpg"
        }
    ]
}
```

```json
{
    "@context": "https://schema.org",
    "@type": "Article",
    "mainEntityOfPage": {
        "@type": "WebPage",
        "@id": "https://options.greeks.live/question/what-are-the-key-differences-in-counterparty-risk-between-cleared-and-otc-options/"
    },
    "headline": "What Are the Key Differences in Counterparty Risk between Cleared and OTC Options? \u25b4 Question",
    "description": "Cleared options mutualize counterparty risk through a central guarantor; OTC options retain direct, bilateral exposure. \u25b4 Question",
    "url": "https://options.greeks.live/question/what-are-the-key-differences-in-counterparty-risk-between-cleared-and-otc-options/",
    "datePublished": "2025-08-06T09:04:11+00:00",
    "dateModified": "2025-08-06T09:04:11+00:00",
    "articleSection": [
        "Question"
    ],
    "author": {
        "@id": "https://greeks.live/#organization"
    },
    "publisher": {
        "@id": "https://greeks.live/#organization"
    },
    "image": {
        "@type": "ImageObject",
        "url": "https://options.greeks.live/wp-content/uploads/2025/07/prime-os-institutional-digital-asset-derivatives-rfq-engine-core-market-microstructure-intelligence-layer.jpg",
        "caption": "Abstractly depicting an institutional-grade Crypto Derivatives OS core engine, where market microstructure facilitates high-fidelity execution. Precision instruments symbolize bilateral RFQ protocols driving price discovery and atomic settlement for multi-leg spread strategies in digital asset derivatives. This intelligence layer manages gamma exposure, achieving capital efficiency via Prime RFQ ensuring best execution and mitigating counterparty risk."
    },
    "keywords": [
        "Bilateral Agreement",
        "CCP",
        "Central Clearing",
        "Central Counterparty Clearing",
        "Cleared Options",
        "Clearing Members",
        "Collateral Management",
        "Counterparty Risk",
        "Default Fund",
        "Default Waterfall",
        "Financial Regulation",
        "ISDA Master Agreement",
        "Margin Calls",
        "Margin Requirements",
        "Master Agreement",
        "OTC Derivatives",
        "OTC Markets",
        "OTC Options",
        "Risk Management",
        "Risk Mitigation",
        "Systemic Risk"
    ]
}
```

```json
{
    "@context": "https://schema.org",
    "@type": "WebSite",
    "url": "https://options.greeks.live/",
    "potentialAction": {
        "@type": "SearchAction",
        "target": "https://options.greeks.live/?s=search_term_string",
        "query-input": "required name=search_term_string"
    }
}
```

```json
{
    "@context": "https://schema.org",
    "@type": "FAQPage",
    "mainEntity": [
        {
            "@type": "Question",
            "name": "How Does Central Clearing Alter Risk Exposure?",
            "acceptedAnswer": {
                "@type": "Answer",
                "text": "Central clearing fundamentally re-engineers the flow of risk. In an OTC arrangement, a default is a singular event between two parties, and the resulting losses are borne entirely by the non-defaulting party. The process of recovery can be lengthy, litigious, and uncertain, governed by the terms of the bilateral ISDA Master Agreement and the complexities of bankruptcy law. The lack of price transparency in many OTC markets can make it difficult to even value the defaulted contract accurately, further complicating the recovery process. "
            }
        },
        {
            "@type": "Question",
            "name": "What Is The Operational Impact Of Margin And Collateral?",
            "acceptedAnswer": {
                "@type": "Answer",
                "text": "The operational management of margin and collateral is a critical function in both cleared and OTC markets, but the processes and complexities differ significantly. In the OTC space, collateral management is a highly fragmented and customized process. Each bilateral relationship is governed by its own Credit Support Annex (CSA), which specifies the terms of the collateral agreement. This requires firms to manage multiple, disparate workflows, and to have the systems and expertise to value a wide range of collateral types. The process of making and receiving margin calls, resolving disputes, and managing the custody of collateral is a significant operational undertaking. "
            }
        }
    ]
}
```


---

**Original URL:** https://options.greeks.live/question/what-are-the-key-differences-in-counterparty-risk-between-cleared-and-otc-options/
